Lonza Group Ltd (VTX:LONN) closed yesterday at CHF317.2, which left some investors asking whether the high earnings potential can still be justified at this price. Below I will be talking through a basic metric which will help answer this question.
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What are the future expectations?
Analysts are predicting good growth prospects for Lonza Group over the next couple of years. The consensus forecast from 13 analysts is buoyant with earnings forecasted to rise significantly from today’s level of CHF8.803 to CHF14.126 over the next three years. This results in an annual growth rate of 14%, on average, which illustrates an optimistic outlook in the near term.
Can LONN’s share price be justified by its earnings growth?
LONN is trading at quite a high price-to-earnings (PE) ratio of 36.03x. This tells us that Lonza Group is overvalued compared to the CH market average ratio of 17.87x , and undervalued based on its latest annual earnings update compared to the Life Sciences average of 40.08x .
Lonza Group’s price-to-earnings ratio stands at 36.03x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. But, since Lonza Group is a high-growth stock, we must also account for its earnings growth by using calculation called the PEG ratio. A PE ratio of 36.03x and expected year-on-year earnings growth of 14% give Lonza Group a quite high PEG ratio of 2.61x. Based on this growth, Lonza Group’s stock can be considered overvalued , based on the fundamentals.
What this means for you:
LONN’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:
- Financial Health: Are LONN’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.
- Past Track Record: Has LONN 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 LONN’s historicals for more clarity.
- 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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