Is Michael Hill International Limited (ASX:MHJ) Potentially Undervalued?

Michael Hill International Limited (ASX:MHJ), might not be a large cap stock, but it saw a decent share price growth in the teens level on the ASX over the last few months. With many analysts covering the stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. However, what if the stock is still a bargain? Let’s take a look at Michael Hill International’s outlook and value based on the most recent financial data to see if the opportunity still exists.

Check out 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. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 8.41x is currently trading slightly below its industry peers’ ratio of 9.74x, 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?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. 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. However, with a negative profit growth of -7.1% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Michael Hill International. This certainty tips the risk-return scale towards higher risk.

What This Means For You

Are you a shareholder? MHJ seems priced close to industry peers right now, but given the uncertainty from negative returns in the future, this could be the right time to de-risk your portfolio. Is your current exposure to the stock beneficial for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on MHJ, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on MHJ for a while, now may not be the most optimal time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. Furthermore, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help crystallize your views on MHJ should the price fluctuate below the industry PE ratio.

With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 1 warning sign with Michael Hill International, and understanding this should be part of your investment process.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.