Stock Analysis

Benign Growth For Companhia Brasileira de Alumínio (BVMF:CBAV3) Underpins Stock's 31% Plummet

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Companhia Brasileira de Alumínio (BVMF:CBAV3) shareholders that were waiting for something to happen have been dealt a blow with a 31% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 62% share price decline.

Following the heavy fall in price, given close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") above 10x, you may consider Companhia Brasileira de Alumínio as an attractive investment with its 5.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been advantageous for Companhia Brasileira de Alumínio as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Companhia Brasileira de Alumínio

BOVESPA:CBAV3 Price Based on Past Earnings March 16th 2023
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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Companhia Brasileira de Alumínio would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth is heading into negative territory, declining 18% each year over the next three years. Meanwhile, the broader market is forecast to expand by 18% per annum, which paints a poor picture.

In light of this, it's understandable that Companhia Brasileira de Alumínio's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Companhia Brasileira de Alumínio's recently weak share price has pulled its P/E below most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Companhia Brasileira de Alumínio's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 3 warning signs for Companhia Brasileira de Alumínio (1 is concerning!) that we have uncovered.

If these risks are making you reconsider your opinion on Companhia Brasileira de Alumínio, explore our interactive list of high quality stocks to get an idea of what else is out there.

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