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

LEONI AG (FRA:LEO) is considered a high growth stock. However its last closing price of €42.5 left investors wondering whether this growth has already been factored into the share price. Let’s look into this by assessing LEO’s expected growth over the next few years.

Check out our latest analysis for LEONI

What can we expect from LEONI in the future?

Analysts are predicting good growth prospects for LEONI over the next couple of years. Expectations from 17 analysts are bullish with earnings per share estimated to surge from current levels of €4.672 to €6.215 over the next three years. On average, this leads to a growth rate of 11.96% each year, which illustrates an optimistic outlook in the near term.

Is LEO’s share price justified by its earnings growth?

Stocks like LEONI, with a price-to-earnings (P/E) ratio of 9.1x, 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 17.76x , and undervalued based on its latest annual earnings update compared to the auto components average of 13.98x . This multiple is a median of profitable companies of 23 Auto Components companies in DE including SORL Auto Parts, American Axle & Manufacturing Holdings and China XD Plastics.

DB:LEO PE PEG Gauge August 15th 18
DB:LEO PE PEG Gauge August 15th 18

Given that LEO’s price-to-earnings of 9.1x lies below the industry average, this already indicates that the company could be potentially undervalued. However, since LEONI is a high-growth stock, we must also account for its earnings growth by using calculation called the PEG ratio. A PE ratio of 9.1x and expected year-on-year earnings growth of 11.96% give LEONI a very low PEG ratio of 0.76x. This tells us that when we include its growth in our analysis LEONI’s stock can be considered relatively cheap , based on its 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 urge 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.