Reliance Worldwide Corporation Limited (ASX:RWC) closed yesterday at A$4.6, which left some investors asking whether the high earnings potential can still be justified at this price. Let’s look into this by assessing RWC’s expected growth over the next few years.
Should you get excited about RWC’s future?
One reason why investors are attracted to RWC is the high growth potential in the near future. Expectations from 10 analysts are extremely bullish with earnings per share estimated to rise from today’s level of A$0.135 to A$0.263 over the next three years. This indicates an estimated earnings growth rate of 20% per year, on average, which signals a market-beating outlook in the upcoming years.
Is RWC’s share price justifiable by its earnings growth?
Reliance Worldwide is trading at price-to-earnings (PE) ratio of 34.14x, this tells us the stock is overvalued compared to the AU market average ratio of 16.33x , and overvalued based on current earnings compared to the Building industry average of 16.98x .
We understand RWC seems to be overvalued based on its current earnings, compared to its industry peers. However, to properly examine the value of a high-growth stock such as Reliance Worldwide, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 34.14x and expected year-on-year earnings growth of 20% give Reliance Worldwide a higher PEG ratio of 1.73x. Based on this growth, Reliance Worldwide’s stock can be considered a bit overvalued , based on the fundamentals.
What this means for you:
RWC’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:
- Financial Health: Are RWC’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.
- Past Track Record: Has RWC 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 RWC’s historicals for more clarity.
- 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.
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