Is Dunelm Group plc (LON:DNLM) Potentially Undervalued?

By
Simply Wall St
Published
July 01, 2021
LSE:DNLM
Source: Shutterstock

Dunelm Group plc (LON:DNLM), might not be a large cap stock, but it saw significant share price movement during recent months on the LSE, rising to highs of UK£15.51 and falling to the lows of UK£12.83. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Dunelm Group's current trading price of UK£14.02 reflective of the actual value of the mid-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Dunelm Group’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

See our latest analysis for Dunelm Group

Is Dunelm Group still cheap?

According to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and the industry average, the stock price seems to be justfied. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 25.71x is currently trading slightly above its industry peers’ ratio of 21.07x, which means if you buy Dunelm Group today, you’d be paying a relatively reasonable price for it. And if you believe Dunelm Group should be trading in this range, then there isn’t really any room for the share price grow beyond the levels of other industry peers over the long-term. Is there another opportunity to buy low in the future? Since Dunelm Group’s share price is quite volatile, we could potentially see it sink lower (or rise higher) in the future, giving us another chance to buy. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

What kind of growth will Dunelm Group generate?

earnings-and-revenue-growth
LSE:DNLM Earnings and Revenue Growth July 1st 2021

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. 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. With profit expected to grow by 29% over the next couple of years, the future seems bright for Dunelm Group. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.

What this means for you:

Are you a shareholder? DNLM’s optimistic future growth appears to have been factored into the current share price, with shares trading around industry price multiples. 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 DNLM? Will you have enough confidence to invest in the company should the price drop below the industry PE ratio?

Are you a potential investor? If you’ve been keeping an eye on DNLM, now may not be the most advantageous time to buy, given it is trading around industry price multiples. However, the positive outlook is encouraging for DNLM, 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.

So while earnings quality is important, it's equally important to consider the risks facing Dunelm Group at this point in time. You'd be interested to know, that we found 1 warning sign for Dunelm Group and you'll want to know about this.

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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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