Is Pacific Energy Limited (ASX:PEA) Undervalued After Accounting For Its Future Growth?

Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!

Pacific Energy Limited (ASX:PEA) is considered a high growth stock. However its last closing price of A$0.645 left investors wondering whether this growth has already been factored into the share price. Let’s take a look at some key metrics to determine whether there’s any value here for current and potential future investors.

See our latest analysis for Pacific Energy

Should you get excited about PEA’s future?

If you are bullish about Pacific Energy’s growth potential then you are certainly not alone. The consensus forecast from 2 analysts is extremely bullish with earnings per share estimated to rise from today’s level of A$0.0318 to A$0.0605 over the next three years. This indicates an estimated earnings growth rate of 20% per year, on average, which illustrates a highly optimistic outlook in the near term.

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

Pacific Energy is available at price-to-earnings ratio of 20.3x, showing us it is overvalued based on current earnings compared to the Renewable Energy industry average of 10.1x , and overvalued compared to the AU market average ratio of 15.64x .

ASX:PEA Price Estimation Relative to Market, February 22nd 2019
ASX:PEA Price Estimation Relative to Market, February 22nd 2019

After looking at PEA’s value based on current earnings, we can see it seems overvalued relative to other companies in the industry. But, to be able to properly assess the value of a high-growth stock such as Pacific Energy, we must incorporate its earnings growth in our valuation. The PEG ratio is a great calculation to take account of growth in the stock’s valuation. A PE ratio of 20.3x and expected year-on-year earnings growth of 20% give Pacific Energy an acceptable PEG ratio of 1x. Based on this growth, Pacific Energy’s stock can be considered slightly overvalued , based on fundamental analysis.

What this means for you:

PEA’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:

  1. Financial Health: Are PEA’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. Past Track Record: Has PEA 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 PEA’s historicals for more clarity.
  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.