Is People Infrastructure Ltd’s (ASX:PPE) Growth Strong Enough To Justify Its July Share Price?

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People Infrastructure Ltd (ASX:PPE) is considered a high-growth stock, but its last closing price of A$3.42 left some investors wondering if this high future earnings potential can be rationalized by its current price tag. Below I will be talking through a basic metric which will help answer this question.

See our latest analysis for People Infrastructure

Exciting times ahead for PPE

People Infrastructure’s extremely high growth potential in the near future is attracting investors. Expectations from 3 analysts are extremely bullish with earnings per share estimated to rise from today’s level of A$0.139 to A$0.258 over the next three years. This results in an annual growth rate of 30%, on average, which illustrates a highly optimistic outlook in the near term.

Can PPE’s share price be justified by its earnings growth?

PPE is trading at price-to-earnings (PE) ratio of 24.55x, which suggests that People Infrastructure is overvalued based on current earnings compared to the Professional Services industry average of 19.87x , and overvalued compared to the AU market average ratio of 16.31x .

ASX:PPE Price Estimation Relative to Market, July 10th 2019
ASX:PPE Price Estimation Relative to Market, July 10th 2019

After looking at PPE’s value based on current earnings, we can see it seems overvalued relative to other companies in the industry. However, seeing as People Infrastructure is perceived as a high-growth stock, we must also account for its earnings growth, which is captured in the PEG ratio. A PE ratio of 24.55x and expected year-on-year earnings growth of 30% give People Infrastructure a low PEG ratio of 0.81x. This tells us that when we include its growth in our analysis People Infrastructure’s stock can be considered fairly valued , based on the fundamentals.

What this means for you:

PPE’s current undervaluation could signal a potential buying opportunity to increase your exposure to the stock, or it you’re a potential investor, now may 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 PPE’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. Valuation: What is PPE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PPE is currently mispriced by the market.
  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.