Does The Hype Around Genworth Mortgage Insurance Australia Limited’s (ASX:GMA) Growth Justify Its March Share Price?

Growth expectations for Genworth Mortgage Insurance Australia Limited (ASX:GMA) are high, but many investors are starting to ask whether its last close at A$2.5 can still be rationalized by the future potential. Below I will be talking through a basic metric which will help answer this question.

View our latest analysis for Genworth Mortgage Insurance Australia

How is GMA going to perform in the future?

Analysts are predicting good growth prospects for Genworth Mortgage Insurance Australia over the next couple of years. Expectations from 3 analysts are certainly positive with earnings per share estimated to surge from current levels of A$0.165 to A$0.297 over the next three years. On average, this leads to a growth rate of 13% each year, which illustrates an optimistic outlook in the near term.

Is GMA’s share price justified by its earnings growth?

Genworth Mortgage Insurance Australia is trading at quite low price-to-earnings (PE) ratio of 15.19x. This tells us the stock is undervalued relative to the current AU market average of 16.29x , and overvalued based on current earnings compared to the Mortgage industry average of 14.48x .

ASX:GMA Price Estimation Relative to Market, March 15th 2019
ASX:GMA Price Estimation Relative to Market, March 15th 2019

We already know that GMA appears to be overvalued when compared to its industry average. But, since Genworth Mortgage Insurance Australia is a high-growth stock, we must also account for its earnings growth by using calculation called the PEG ratio. A PE ratio of 15.19x and expected year-on-year earnings growth of 13% give Genworth Mortgage Insurance Australia an acceptable PEG ratio of 1.13x. So, when we include the growth factor in our analysis, Genworth Mortgage Insurance Australia appears slightly overvalued , based on fundamental analysis.

What this means for you:

GMA’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Financial Health: Are GMA’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has GMA been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of GMA’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.