Does The Hype Around Dechra Pharmaceuticals PLC’s (LON:DPH) Growth Justify Its February Share Price?

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Dechra Pharmaceuticals PLC (LON:DPH) is considered a high growth stock. However its last closing price of £25.68 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 Dechra Pharmaceuticals

How is DPH going to perform in the future?

Dechra Pharmaceuticals is poised for significantly high earnings growth in the near future. The consensus forecast from 8 analysts is extremely bullish with earnings per share estimated to surge from current levels of £0.372 to £0.529 over the next three years. On average, this leads to a growth rate of 22% each year, which signals a market-beating outlook in the upcoming years.

Is DPH available at a good price after accounting for its growth?

Dechra Pharmaceuticals is available at price-to-earnings ratio of 68.96x, showing us it is overvalued based on current earnings compared to the Pharmaceuticals industry average of 29.85x , and overvalued compared to the GB market average ratio of 15.87x .

LSE:DPH Price Estimation Relative to Market, February 18th 2019
LSE:DPH Price Estimation Relative to Market, February 18th 2019

We already know that DPH appears to be overvalued when compared to its industry average. However, to be able to properly assess the value of a high-growth stock such as Dechra Pharmaceuticals, 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 68.96x and expected year-on-year earnings growth of 22% give Dechra Pharmaceuticals a quite high PEG ratio of 3.15x. Based on this growth, Dechra Pharmaceuticals’s stock can be considered overvalued , based on fundamental analysis.

What this means for you:

DPH’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 DPH’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 DPH 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 DPH’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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.