Is TransAlta Corporation (TSE:TA) Potentially Undervalued?

TransAlta Corporation (TSE:TA), might not be a large cap stock, but it saw a decent share price growth of 15% on the TSX over the last few months. While good news for shareholders, the company has traded much higher in the past year. As a CA$3.0b market cap stock, it seems odd TransAlta is not more well-covered by analysts. Although, there is more of an opportunity for mispricing in stocks with low coverage, which can be a good thing. So, could the stock still be trading at a low price relative to its actual value? Let’s take a look at TransAlta’s outlook and value based on the most recent financial data to see if the opportunity still exists.

View our latest analysis for TransAlta

What's The Opportunity In TransAlta?

Great news for investors – TransAlta is still trading at a fairly cheap price according to our price multiple model, where we compare the company's price-to-earnings ratio to the industry average. We’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 5.37x is currently well-below the industry average of 7.7x, meaning that it is trading at a cheaper price relative to its peers. TransAlta’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. If you believe the share price should eventually reach its industry peers, a low beta could suggest it is unlikely to rapidly do so anytime soon, and once it’s there, it may be hard to fall back down into an attractive buying range.

What does the future of TransAlta look like?

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. However, with an expected decline of -9.8% in revenues over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for TransAlta. This certainty tips the risk-return scale towards higher risk.

What This Means For You

Are you a shareholder? Although TA is currently trading below the industry PE ratio, the adverse prospect of negative growth brings about some degree of risk. We recommend you think about whether you want to increase your portfolio exposure to TA, or whether diversifying into another stock may be a better move for your total risk and return.

Are you a potential investor? If you’ve been keeping an eye on TA for a while, but hesitant on making the leap, we recommend you dig deeper into the stock. Given its current price multiple, now is a great time to make a decision. But keep in mind the risks that come with negative growth prospects in the future.

With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 4 warning signs for TransAlta and we think they deserve your attention.

If you are no longer interested in TransAlta, 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com