Stock Analysis

At AU$0.81, Is It Time To Put Michael Hill International Limited (ASX:MHJ) On Your Watch List?

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ASX:MHJ
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While Michael Hill International Limited (ASX:MHJ) might not be the most widely known stock at the moment, it received a lot of attention from a substantial price increase on the ASX over the last few months. As a small cap stock, which tends to lack high analyst coverage, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Let’s examine Michael Hill International’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

View our latest analysis for Michael Hill International

What is Michael Hill International worth?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Michael Hill International’s ratio of 15.32x is trading slightly below its industry peers’ ratio of 18.46x, which means if you buy Michael Hill International today, you’d be paying a reasonable price for it. And if you believe that Michael Hill International should be trading at this level in the long run, then there’s not much of an upside to gain over and above other industry peers. So, is there another chance to buy low in the future? Given that Michael Hill International’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.

What does the future of Michael Hill International look like?

earnings-and-revenue-growth
ASX:MHJ Earnings and Revenue Growth May 5th 2021

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. Michael Hill International's earnings over the next few years are expected to increase by 83%, indicating a highly optimistic future ahead. This should lead to more robust cash flows, feeding into a higher share value.

What this means for you:

Are you a shareholder? MHJ’s optimistic future growth appears to have been factored into the current share price, with shares trading around industry price multiples. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at MHJ? Will you have enough confidence to invest in the company should the price drop below the industry PE ratio?

Are you a potential investor? If you’ve been keeping an eye on MHJ, now may not be the most advantageous time to buy, given it is trading around industry price multiples. However, the optimistic forecast is encouraging for MHJ, which means it’s worth diving deeper into other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.

If you'd like to know more about Michael Hill International as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for Michael Hill International and we think they deserve your attention.

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