Is Neoenergia S.A. (BVMF:NEOE3) Potentially Undervalued?

Neoenergia S.A. (BVMF:NEOE3), is not the largest company out there, but it received a lot of attention from a substantial price movement on the BOVESPA over the last few months, increasing to R$18.48 at one point, and dropping to the lows of R$15.73. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Neoenergia's current trading price of R$15.84 reflective of the actual value of the mid-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Neoenergia’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

View our latest analysis for Neoenergia

What is Neoenergia worth?

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 5.03x is currently trading slightly below its industry peers’ ratio of 6.68x, which means if you buy Neoenergia today, you’d be paying a decent price for it. And if you believe Neoenergia should be trading in this range, then there isn’t much room for the share price to grow beyond the levels of other industry peers over the long-term. In addition to this, it seems like Neoenergia’s share price is quite stable, which could mean there may be less chances to buy low in the future now that it’s trading around the price multiples of other industry peers. This is because the stock is less volatile than the wider market given its low beta.

What kind of growth will Neoenergia generate?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. 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 an extremely negative double-digit change in profit expected over the next couple of years, near-term growth is certainly not a driver of a buy decision. It seems like high uncertainty is on the cards for Neoenergia, at least in the near future.

What this means for you:

Are you a shareholder? NEOE3 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 reduce the risk in your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on NEOE3, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on NEOE3 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. 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 NEOE3 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. Our analysis shows 2 warning signs for Neoenergia (1 can't be ignored!) and we strongly recommend you look at them before investing.

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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.
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