Does The Hype Around Polypipe Group plc’s (LON:PLP) Growth Justify Its December Share Price?

Polypipe Group plc (LON:PLP) is considered a high growth stock. However its last closing price of £3.252 left investors wondering whether this growth has already been factored into the share price. Below I will be talking through a basic metric which will help answer this question.

View our latest analysis for Polypipe Group

Where’s the growth?

Analysts are predicting good growth prospects for Polypipe Group over the next couple of years. The consensus forecast from 5 analysts is bullish with earnings per share estimated to surge from current levels of £0.227 to £0.286 over the next three years. This indicates an estimated earnings growth rate of 10% per year, on average, which illustrates an optimistic outlook in the near term.

Is PLP’s share price justifiable by its earnings growth?

Stocks like Polypipe Group, with a price-to-earnings (P/E) ratio of 14.3x, 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 PLP is undervalued relative to the current GB market average of 14.71x , and overvalued based on current earnings compared to the Building industry average of 13.04x .

LSE:PLP PE PEG Gauge December 22nd 18
LSE:PLP PE PEG Gauge December 22nd 18

We already know that PLP appears to be overvalued when compared to its industry average. However, to properly examine the value of a high-growth stock such as Polypipe Group, 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 14.3x and expected year-on-year earnings growth of 10% give Polypipe Group a higher PEG ratio of 1.39x. This means that, when we account for Polypipe Group’s growth, the stock can be viewed as slightly overvalued , based on the fundamentals.

What this means for you:

PLP’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:

  1. Financial Health: Are PLP’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 PLP 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 PLP’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.