Is There Now An Opportunity In São Martinho S.A. (BVMF:SMTO3)?

São Martinho S.A. (BVMF:SMTO3), is not the largest company out there, but it received a lot of attention from a substantial price increase on the BOVESPA over the last few months. 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 examine São Martinho’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

Check out our latest analysis for São Martinho

Is São Martinho 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. 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 10.41x is currently trading slightly below its industry peers’ ratio of 10.44x, which means if you buy São Martinho today, you’d be paying a reasonable price for it. And if you believe that São Martinho 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. Furthermore, São Martinho’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. This may mean it is less likely for the stock to fall lower from natural market volatility, which suggests less opportunities to buy moving forward.

What kind of growth will São Martinho 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. However, with a negative profit growth of -5.8% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for São Martinho. This certainty tips the risk-return scale towards higher risk.

What this means for you:

Are you a shareholder? Currently, SMTO3 appears to be trading around industry price multiples, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in 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 SMTO3, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on SMTO3 for a while, now may not be the most advantageous time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. In addition to this, 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 gel your views on SMTO3 should the price fluctuate below the industry PE ratio.

If you want to dive deeper into São Martinho, you'd also look into what risks it is currently facing. At Simply Wall St, we found 3 warning signs for São Martinho and we think they deserve your attention.

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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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