Is Encana Corporation (TSE:ECA) Undervalued After Accounting For Its Future Growth?

Encana Corporation (TSE:ECA) is considered a high growth stock. However its last closing price of CA$5.9 left investors wondering whether this growth has already been factored into the share price. Let’s look into this by assessing ECA's expected growth over the next few years.

Check out our latest analysis for Encana

How is ECA going to perform in the future?

One reason why investors are attracted to ECA is the high growth potential in the near future. The consensus forecast from 13 analysts is extremely positive with earnings forecasted to rise significantly from today's level of $1.029 to $1.031 over the next three years. On average, this leads to a growth rate of 22% each year, which signals a market-beating outlook in the upcoming years.

Can ECA's share price be justified by its earnings growth?

We all love low PE stocks, but when it's too low, for example, in the case of Encana, something starts to smell. Why are investors placing such a low value on the company's earnings? ECA's price-to-earnings ratio is sitting at 4.31x, which tells us the company is undervalued based on its latest annual earnings update compared to the Oil and Gas average of 8.3x , and undervalued relative to the current CA market average of 14.18x .

Given that ECA's price-to-earnings of 4.31x lies below the industry average, this already indicates that the company could be potentially undervalued. But, to be able to properly assess the value of a high-growth stock such as Encana, we must incorporate its earnings growth in our valuation. The PEG ratio is a great calculation to take account of growth in the stock's valuation. A PE ratio of 4.31x and expected year-on-year earnings growth of 22% give Encana an extremely low PEG ratio of 0.19x. So, when we include the growth factor in our analysis, Encana appears relatively cheap , based on the fundamentals.

What this means for you:

ECA'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 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.

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.