Is It Too Late To Consider Buying Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3)?

Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3), might not be a large cap stock, but it received a lot of attention from a substantial price increase on the BOVESPA over the last few months. As a mid-cap 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 Companhia de Saneamento Básico do Estado de São Paulo - SABESP’s outlook and value based on the most recent financial data to see if the opportunity still exists.

See our latest analysis for Companhia de Saneamento Básico do Estado de São Paulo - SABESP

What is Companhia de Saneamento Básico do Estado de São Paulo - SABESP worth?

According to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average, the stock currently looks expensive. 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 Companhia de Saneamento Básico do Estado de São Paulo - SABESP’s ratio of 30.18x is above its peer average of 15.42x, which suggests the stock is trading at a higher price compared to the Water Utilities industry. Another thing to keep in mind is that Companhia de Saneamento Básico do Estado de São Paulo - SABESP’s share price is quite stable relative to the rest of the market, as indicated by its low beta. This means that if you believe the current share price should move towards the levels of its industry peers over time, a low beta could suggest it is not likely to reach that level anytime soon, and once it’s there, it may be hard for it to fall back down into an attractive buying range again.

What kind of growth will Companhia de Saneamento Básico do Estado de São Paulo - SABESP 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. Companhia de Saneamento Básico do Estado de São Paulo - SABESP'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 well and truly priced in SBSP3’s positive outlook, with shares trading above industry price multiples. At this current price, shareholders may be asking a different question – should I sell? If you believe SBSP3 should trade below its current price, selling high and buying it back up again when its price falls towards the industry PE ratio can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on SBSP3 for a while, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the optimistic prospect is encouraging for SBSP3, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

If you'd like to know more about Companhia de Saneamento Básico do Estado de São Paulo - SABESP as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 2 warning signs with Companhia de Saneamento Básico do Estado de São Paulo - SABESP, and understanding these should be part of your investment process.

If you are no longer interested in Companhia de Saneamento Básico do Estado de São Paulo - SABESP, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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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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