Is It Time To Consider Buying Science Group plc (LON:SAG)?

By
Simply Wall St
Published
June 03, 2021
AIM:SAG
Source: Shutterstock

Science Group plc (LON:SAG), might not be a large cap stock, but it led the AIM gainers with a relatively large price hike in the past couple of weeks. Less-covered, small caps tend to present more of an opportunity for mispricing due to the lack of information available to the public, which can be a good thing. So, could the stock still be trading at a low price relative to its actual value? Let’s take a look at Science Group’s outlook and value based on the most recent financial data to see if the opportunity still exists.

See our latest analysis for Science Group

What is Science Group worth?

Great news for investors – Science Group is still trading at a fairly cheap price 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 Science Group’s ratio of 23.95x is below its peer average of 36.2x, which indicates the stock is trading at a lower price compared to the Professional Services industry. Another thing to keep in mind is that Science Group’s share price is quite stable relative to the rest of the market, as indicated by its low beta. This means that if you believe the current share price should move towards its industry peers, a low beta could suggest it is not likely to reach that level anytime soon, and once it’s there, it may be hard to fall back down into an attractive buying range again.

Can we expect growth from Science Group?

earnings-and-revenue-growth
AIM:SAG Earnings and Revenue Growth June 4th 2021

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. 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 a negative profit growth of -19% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Science Group. This certainty tips the risk-return scale towards higher risk.

What this means for you:

Are you a shareholder? Although SAG is currently trading below the industry PE ratio, the adverse prospect of negative growth brings about some degree of risk. Consider whether you want to increase your portfolio exposure to SAG, or whether diversifying into another stock may be a better move for your total risk and return.

Are you a potential investor? If you’ve been keeping tabs on SAG for some time, but hesitant on making the leap, I recommend you dig deeper into the stock. Given its current price multiple, now is a great time to make a decision. But keep in mind the risks that come with negative growth prospects in the future.

If you'd like to know more about Science Group as a business, it's important to be aware of any risks it's facing. For instance, we've identified 3 warning signs for Science Group (1 makes us a bit uncomfortable) you should be familiar with.

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