Galliford Try plc (LON:GFRD) closed yesterday at £6.89, 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.
What can we expect from Galliford Try in the future?
Galliford Try’s growth potential is very attractive. The consensus forecast from 4 analysts is extremely positive with earnings forecasted to rise significantly from today’s level of £1.033 to £1.436 over the next three years. This results in an annual growth rate of 17%, on average, which indicates an exceedlingly positive future in the near term.
Is GFRD’s share price justifiable by its earnings growth?
Stocks like Galliford Try, with a price-to-earnings (P/E) ratio of 6.67x, 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 GFRD is undervalued relative to the current GB market average of 16x , and undervalued based on its latest annual earnings update compared to the Construction average of 10.32x .
Galliford Try’s price-to-earnings ratio stands at 6.67x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. However, to properly examine the value of a high-growth stock such as Galliford Try, 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 6.67x and expected year-on-year earnings growth of 17% give Galliford Try an extremely low PEG ratio of 0.40x. Based on this growth, Galliford Try’s stock can be considered relatively cheap , based on fundamental analysis.
What this means for you:
GFRD’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:
- Financial Health: Are GFRD’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 GFRD 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 GFRD’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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