Is Now The Time To Look At Buying Covestro AG (ETR:1COV)?

While Covestro AG (ETR:1COV) might not be the most widely known stock at the moment, it received a lot of attention from a substantial price movement on the XTRA over the last few months, increasing to €54.68 at one point, and dropping to the lows of €37.54. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Covestro's current trading price of €38.43 reflective of the actual value of the mid-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Covestro’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

See our latest analysis for Covestro

What is Covestro worth?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Covestro’s ratio of 4.49x is trading slightly below its industry peers’ ratio of 8.66x, which means if you buy Covestro today, you’d be paying a decent price for it. And if you believe Covestro should be trading in this range, then there isn’t much room for the share price to grow beyond the levels of other industry peers over the long-term. Is there another opportunity to buy low in the future? Since Covestro’s share price is quite volatile, we could potentially see it sink lower (or rise higher) in the future, giving us another chance to buy. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

What does the future of Covestro look like?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. However, with an extremely negative double-digit change in profit expected over the next couple of years, near-term growth is certainly not a driver of a buy decision. It seems like high uncertainty is on the cards for Covestro, at least in the near future.

What this means for you:

Are you a shareholder? 1COV seems priced close to industry peers right now, but given the uncertainty from negative returns in the future, this could be the right time to de-risk your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on 1COV, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on 1COV for a while, now may not be the most advantageous time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. In addition to this, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help gel your views on 1COV should the price fluctuate below the industry PE ratio.

So while earnings quality is important, it's equally important to consider the risks facing Covestro at this point in time. At Simply Wall St, we found 2 warning signs for Covestro and we think they deserve your attention.

If you are no longer interested in Covestro, 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.