Stock Analysis

Does Encana Corporation's (TSE:ECA) April Stock Price Reflect Its Future Growth?

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Encana Corporation (TSX:ECA) closed yesterday at CA$14.73, which left some investors asking whether the high earnings potential can still be justified at this price. Let’s take a look at some key metrics to determine whether there's any value here for current and potential future investors. Check out our latest analysis for Encana

Where's the growth?

According to the analysts covering the company, the following few years should bring about good growth prospects for Encana. The consensus forecast from 12 analysts is buoyant with earnings forecasted to rise significantly from today's level of $0.85 to $1.552 over the next three years. This indicates an estimated earnings growth rate of 12.57% per year, on average, which indicates a solid future in the near term.

Is ECA available at a good price after accounting for its growth?

Encana is trading at quite low price-to-earnings (PE) ratio of 13.79x. This tells us the stock is undervalued relative to the current CA market average of 15.56x , and undervalued based on its latest annual earnings update compared to the oil and gas average of 15.38x .

TSX:ECA PE PEG Gauge Apr 12th 18
TSX:ECA PE PEG Gauge Apr 12th 18

Given that ECA's price-to-earnings of 13.79x lies below the industry average, this already indicates that the company could be potentially undervalued. However, since Encana is a high-growth stock, we must also account for its earnings growth by using calculation called the PEG ratio. A PE ratio of 13.79x and expected year-on-year earnings growth of 12.57% give Encana an acceptable PEG ratio of 1.1x. This tells us that when we include its growth in our analysis Encana's stock can be considered slightly overvalued , based on the fundamentals.

What this means for you:

ECA's current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you're a potential investor, now may not 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: Is ECA’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 ECA 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 ECA'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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.