Is M&C Saatchi plc (LON:SAA) Potentially Undervalued?

M&C Saatchi plc (LON:SAA), 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. As a small cap stock, hardly covered by any analysts, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Let’s take a look at M&C Saatchi’s outlook and value based on the most recent financial data to see if the opportunity still exists.

See our latest analysis for M&C Saatchi

Is M&C Saatchi still cheap?

The stock seems fairly valued at the moment according to my valuation model. It’s trading around 4.65% above my intrinsic value, which means if you buy M&C Saatchi today, you’d be paying a relatively fair price for it. And if you believe the company’s true value is £0.78, there’s only an insignificant downside when the price falls to its real value. So, is there another chance to buy low in the future? Given that M&C Saatchi’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.

What does the future of M&C Saatchi look like?

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. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. In M&C Saatchi's case, its revenues are expected to grow by 37% over the next year, indicating a highly optimistic future ahead. If expense does not increase by the same rate, or higher, this top line growth should lead to stronger cash flows, feeding into a higher share value.

What this means for you:

Are you a shareholder? SAA’s optimistic future growth appears to have been factored into the current share price, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the track record of its management team. Have these factors changed since the last time you looked at the stock? Will you have enough conviction to buy should the price fluctuates below the true value?

Are you a potential investor? If you’ve been keeping tabs on SAA, now may not be the most optimal time to buy, given it is trading around its fair value. However, the optimistic prospect is encouraging for the company, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.

Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, M&C Saatchi has 4 warning signs (and 2 which are potentially serious) we think you should know about.

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This article by Simply Wall St is general in nature. 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.
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