Growth expectations for Northern Star Resources Limited (ASX:NST) are high, but many investors are starting to ask whether its last close at $4.91 can still be rationalized by the future potential. There are some general checks that I have up my sleeve when I have uncertainties over the value a company is providing. Let’s take a look at how NST stacks up against these. View our latest analysis for Northern Star Resources
Should you get excited about NST’s future?
Investors in Northern Star Resources have been patiently waiting for the uptick in earnings and if you believe the 9 analysts covering the stock then the next 3 years will be very interesting. We should see 75.3% growth and estimates for earnings per share range from $0.43 to $0.58.This will project the annual earnings to levels higher than recent years.
During the same time revenue is predicted to grow from $792 Million to $1.14 Billion in 2020 and profit is predicted to grow from $190 Million to $306 Million in 2020, roughly growing 1.6x. Margins are predicted to be extremely healthy during this time as well.
What is Northern Star Resources’s value based on its current earnings?Stocks like Northern Star Resources with a Price to Earnings (P/E) ratio of 16.6x always catch the eye of investors on the hunt for a bargin. In isolation this metric can be a bit too simplistic but in comparison it tells us NST is undervalued relative to the current AU market average of 23.2x and undervalued based on the latest annual earnings update compared to the Materials average of 27.5x .
P/E ratio is simply a stock’s price divided by its earnings per share (EPS). It is a straightforward and popular way of assessing how much investors are willing to pay for each dollar a company earns.
Is NST’s share price justifiable by its earnings growth?
The price-to-earnings ratio of Northern Star Resources stands at 16.6, compared to the industry average this already suggests that it could be undervalued.But since Northern Star Resources is a high growth stock, we must also account for its earnings growth by using calculation called PEG ratio.
The PEG ratio (price/earnings to growth ratio) is a valuation metric used to assess the relative trade-off between the price of a stock, the earnings per share (EPS), and the company’s expected growth. Since P/E ratio is in general higher for a company with a higher growth rate, using just the P/E ratio would make high-growth companies appear overvalued relative to others. By dividing the P/E ratio by the earnings growth rate, the resulting ratio is considered to provide a more complete picture when comparing companies with different growth rates.Northern Star Resources’s PE ratio of 16.6x and estimated 36.7% growth in earnings next year give it an extremely low PEG ratio of 0.5x. Based on that Northern Star Resources’s stock can be considered a very good value based on the fundamenals.
What next? If you want to look into Northern Star Resources further I recommend you take a look at our latest FREE analysis report. If you are not interested in NST anymore, you can use our free platform to see my list of stocks which are undervalued when taking in account their future growth potential.