Looking at Faes Farma SA’s (BME:FAE) fundamentals some investors are wondering if its last closing price of €3.76 represents a good value for money for this high growth stock. Below I will be talking through a basic metric which will help answer this question.
Where’s the growth?According to the analysts covering the company, the following few years should bring about good growth prospects for Faes Farma. The consensus forecast from 4 analysts is buoyant with earnings per share estimated to rise from today’s level of €0.180 to €0.261 over the next three years. On average, this leads to a growth rate of 13.74% each year, which indicates a solid future in the near term.
Is FAE’s share price justified by its earnings growth?
FAE is available at a PE (price-to-earnings) ratio of 20.86x today, which tells us the stock is undervalued based on its latest annual earnings update compared to the pharmaceuticals average of 23.15x , and overvalued compared to the ES market average ratio of 19.71x . Since the Pharmaceuticals sector in ES is relatively small, I’ve included similar companies in the wider region in order to get a better idea of the multiple, which is a median of profitable companies of companies such as Laboratorio Reig Jofre, Bayer and Laboratorios Farmaceuticos Rovi.
We already know that FAE appears to be undervalued based on its PE ratio, compared to the industry average. However, to be able to properly assess the value of a high-growth stock such as Faes Farma, we must incorporate its earnings growth in our valuation. The PEG ratio is a great calculation to take account of growth in the stock’s valuation. A PE ratio of 20.86x and expected year-on-year earnings growth of 13.74% give Faes Farma a higher PEG ratio of 1.52x. Based on this growth, Faes Farma’s stock can be considered a bit overvalued , based on the fundamentals.
What this means for you:
FAE’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: Is FAE’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 FAE 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 FAE’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.
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 email@example.com.