1300SMILES Limited (ASX:ONT) closed yesterday at A$6.15, which left some investors asking whether the high earnings potential can still be justified at this price. Let’s take a look at some key metrics to determine whether there’s any value here for current and potential future investors.
Should you get excited about ONT’s future?Investors in 1300SMILES have been patiently waiting for the uptick in earnings. If you believe the analysts covering the stock then the following year will be very interesting. The consensus forecast from 3 analysts is bullish with earnings forecasted to rise significantly from today’s level of A$0.329 to A$0.425 over the next three years. This results in an annual growth rate of 11%, on average, which illustrates an optimistic outlook in the near term.
Can ONT’s share price be justified by its earnings growth?
ONT is available at a PE (price-to-earnings) ratio of 18.67x today, which tells us the stock is undervalued based on its latest annual earnings update compared to the Healthcare average of 18.97x , and overvalued compared to the AU market average ratio of 16.32x .
1300SMILES’s price-to-earnings ratio stands at 18.67x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. However, to properly examine the value of a high-growth stock such as 1300SMILES, 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 18.67x and expected year-on-year earnings growth of 11% give 1300SMILES a higher PEG ratio of 1.75x. Based on this growth, 1300SMILES’s stock can be considered a bit overvalued , based on its fundamentals.
What this means for you:
ONT’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 highly recommend you to complete your research by taking a look at the following:
- Financial Health: Are ONT’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 ONT 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 ONT’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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