Is Cameco Corporation (TSE:CCO) Undervalued After Accounting For Its Future Growth?

Cameco Corporation (TSE:CCO) closed yesterday at CA$11.92, which left some investors asking whether the high earnings potential can still be justified at this price. Let’s look into this by assessing CCO’s expected growth over the next few years.

See our latest analysis for Cameco

What are the future expectations?

Cameco’s extremely high growth potential in the near future is attracting investors. The consensus forecast from 11 analysts is extremely bullish with earnings per share estimated to surge from current levels of CA$0.372 to CA$0.443 over the next three years. On average, this leads to a growth rate of 50% each year, which illustrates a highly optimistic outlook in the near term.

Is CCO’s share price justifiable by its earnings growth?

Cameco is trading at price-to-earnings (PE) ratio of 32.07x, this tells us the stock is overvalued compared to the CA market average ratio of 14.17x , and overvalued based on current earnings compared to the Oil and Gas industry average of 8.16x .

TSX:CCO Price Estimation Relative to Market, August 22nd 2019
TSX:CCO Price Estimation Relative to Market, August 22nd 2019

After looking at CCO’s value based on current earnings, we can see it seems overvalued relative to other companies in the industry. But, to properly examine the value of a high-growth stock such as Cameco, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 32.07x and expected year-on-year earnings growth of 50% give Cameco a very low PEG ratio of 0.65x. Based on this growth, Cameco’s stock can be considered relatively cheap , based on the fundamentals.

What this means for you:

CCO’s current undervaluation could signal a potential buying opportunity to increase your exposure to the stock, or it you’re a potential investor, now may be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Financial Health: Are CCO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has CCO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CCO’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.