Is B&M European Value Retail S.A. (LON:BME) Potentially Undervalued?

B&M European Value Retail S.A. (LON:BME), might not be a large cap stock, but it saw a double-digit share price rise of over 10% in the past couple of months on the LSE. As a mid-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could the stock still be trading at a relatively cheap price? Today I will analyse the most recent data on B&M European Value Retail’s outlook and valuation to see if the opportunity still exists.

Check out our latest analysis for B&M European Value Retail

Is B&M European Value Retail Still Cheap?

The share price seems sensible at the moment 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 B&M European Value Retail’s ratio of 9.91x is trading slightly below its industry peers’ ratio of 11.79x, which means if you buy B&M European Value Retail today, you’d be paying a reasonable price for it. And if you believe B&M European Value Retail should be trading in this range, then there isn’t much room for the share price to grow beyond the levels of other industry peers over the long-term. Furthermore, it seems like B&M European Value Retail’s share price is quite stable, which means there may be less chances to buy low in the future now that it’s priced similarly to industry peers. This is because the stock is less volatile than the wider market given its low beta.

What kind of growth will B&M European Value Retail generate?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. 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. Though in the case of B&M European Value Retail, it is expected to deliver a negative earnings growth of -8.0%, which doesn’t help build up its investment thesis. It appears that risk of future uncertainty is high, at least in the near term.

What This Means For You

Are you a shareholder? BME seems priced close to industry peers right now, but given the uncertainty from negative returns in the future, this could be the right time to de-risk your portfolio. Is your current exposure to the stock beneficial for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on BME, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on BME for a while, now may not be the most optimal time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. In addition to this, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help crystallize your views on BME should the price fluctuate below the industry PE ratio.

So while earnings quality is important, it's equally important to consider the risks facing B&M European Value Retail at this point in time. For instance, we've identified 3 warning signs for B&M European Value Retail (1 is concerning) you should be familiar with.

If you are no longer interested in B&M European Value Retail, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.