Cannindah Resources Limited (ASX:CAE), a AUDA$3.41M small-cap, is a metals and mining operating in an industry which supplies materials for construction. This means it is highly sensitive to changes in the economic cycle, a key driver of building activities. Furthermore, the basic materials sector can be affected by shifts in the housing market, as many produced raw materials are components of construction projects. For example, if new housing development slows, the demand for metal products may also decrease. Basic material analysts are forecasting for the entire industry, a strong double-digit growth of 25.15% in the upcoming year , and a massive growth of 41.20% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. Is the metals and mining industry an attractive sector-play right now? Today, I will analyse the industry outlook, and also determine whether CAE is a laggard or leader relative to its basic materials sector peers. See our latest analysis for CAE
What’s the catalyst for CAE’s sector growth?
Altogether the basic materials sector seems to be predominantly mature in terms of its industry life cycle. Companies appear to be highly competitive and consolidation seems to be a inevitable. However, the industry is still facing many emerging trends including the reduction of waste, raw material inflation, and innovation in global supply chain management. In the previous year, the industry saw growth of 6.76%, beating the Australian market growth of 5.37%. CAE lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means CAE may be trading cheaper than its peers.
Is CAE and the sector relatively cheap?
Metals and mining companies are typically trading at a PE of 14x, in-line with the Australian stock market PE of 17x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. Furthermore, the industry returned a similar 11.83% on equities compared to the market’s 11.92%. Since CAE’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge CAE’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? CAE recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto CAE as part of your portfolio. However, if you’re relatively concentrated in metals and mining, you may want to value CAE based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If CAE has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the metals and mining industry. However, before you make a decision on the stock, I suggest you look at CAE’s future cash flows in order to assess whether the stock is trading at a reasonable price, as well as other important fundamentals such as the company’s financial health in order to build a holistic investment thesis.
For a deeper dive into Cannindah Resources’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other basic materials stocks instead? Use our free playform to see my list of over 2000 other basic materials companies trading on the market.