Why Direcional Engenharia S.A. (BVMF:DIRR3) Could Be Worth Watching

Direcional Engenharia S.A. (BVMF:DIRR3), might not be a large cap stock, but it saw a double-digit share price rise of over 10% in the past couple of months on the BOVESPA. As a stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. But what if there is still an opportunity to buy? Let’s take a look at Direcional Engenharia’s outlook and value based on the most recent financial data to see if the opportunity still exists.

Check out our latest analysis for Direcional Engenharia

Is Direcional Engenharia still cheap?

According to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and the industry average, the stock price seems to be justfied. 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 Direcional Engenharia’s ratio of 19.79x is trading slightly above its industry peers’ ratio of 17.47x, which means if you buy Direcional Engenharia today, you’d be paying a relatively reasonable price for it. And if you believe that Direcional Engenharia should be trading at this level in the long run, then there should only be a fairly immaterial downside vs other industry peers. Although, there may be an opportunity to buy in the future. This is because Direcional Engenharia’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, the company’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.

What kind of growth will Direcional Engenharia generate?

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. Direcional Engenharia's earnings over the next few years are expected to double, indicating a very optimistic future ahead. This should lead to stronger cash flows, feeding into a higher share value.

What this means for you:

Are you a shareholder? It seems like the market has already priced in DIRR3’s positive outlook, with shares trading around industry price multiples. However, there are also other important factors which we haven’t considered today, such as the track record of its management team. Have these factors changed since the last time you looked at DIRR3? 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 tabs on DIRR3, now may not be the most advantageous time to buy, given it is trading around industry price multiples. However, the positive outlook is encouraging for DIRR3, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.

With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, we've found that Direcional Engenharia has 2 warning signs (1 doesn't sit too well with us!) that deserve your attention before going any further with your analysis.

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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. 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.
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