Is LEONI AG (FRA:LEO) Undervalued After Accounting For Its Future Growth?

LEONI AG (FRA:LEO) is considered a high-growth stock, but its last closing price of €17.89 left some investors wondering if this high future earnings potential can be rationalized by its current price tag. 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 LEONI

Where’s the growth?

The excitement around LEONI’s growth potential is not unfounded. Expectations from 15 analysts are extremely bullish with earnings forecasted to rise significantly from today’s level of €2.315 to €3.558 over the next three years. This indicates an estimated earnings growth rate of 19% per year, on average, which indicates an exceedlingly positive future in the near term.

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

Stocks like LEONI, with a price-to-earnings (P/E) ratio of 7.73x, always catch the eye of investors on the hunt for a bargain. In isolation, this metric can be a bit too simplistic but in comparison to benchmarks, it tells us that LEO is undervalued relative to the current DE market average of 18.2x , and undervalued based on its latest annual earnings update compared to the Auto Components average of 9.14x .

DB:LEO Price Estimation Relative to Market, March 25th 2019
DB:LEO Price Estimation Relative to Market, March 25th 2019

We already know that LEO appears to be undervalued based on its PE ratio, compared to the industry average. However, to properly examine the value of a high-growth stock such as LEONI, 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 7.73x and expected year-on-year earnings growth of 19% give LEONI an extremely low PEG ratio of 0.41x. This means that, when we account for LEONI’s growth, the stock can be viewed as relatively cheap , based on the fundamentals.

What this means for you:

LEO’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 highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are LEO’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 LEO 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 LEO’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.