What Is Dunelm Group plc's (LON:DNLM) Share Price Doing?

Dunelm Group plc (LON:DNLM), might not be a large cap stock, but it received a lot of attention from a substantial price movement on the LSE over the last few months, increasing to UK£8.97 at one point, and dropping to the lows of UK£6.88. 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£6.88 reflective of the actual value of the small-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

What Is Dunelm Group Worth?

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. 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 Dunelm Group’s ratio of 9.13x is trading slightly above its industry peers’ ratio of 8.14x, which means if you buy Dunelm Group today, you’d be paying a relatively sensible 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?

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. However, with a negative profit growth of -8.3% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Dunelm Group. This certainty tips the risk-return scale towards higher risk.

What This Means For You

Are you a shareholder? Currently, DNLM appears to be trading around industry price multiples, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on DNLM, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on DNLM 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. Furthermore, 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 DNLM should the price fluctuate below the industry PE ratio.

So while earnings quality is important, it's equally important to consider the risks facing Dunelm Group at this point in time. For example, Dunelm Group has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you are no longer interested in Dunelm Group, 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.