Is It Time To Consider Buying Pendragon PLC (LON:PDG)?

By
Simply Wall St
Published
May 26, 2021
LSE:PDG
Source: Shutterstock

Pendragon PLC (LON:PDG), is not the largest company out there, but it received a lot of attention from a substantial price increase on the LSE over the last few months. Less-covered, small caps sees more of an opportunity for mispricing due to the lack of information available to the public, which can be a good thing. So, could the stock still be trading at a low price relative to its actual value? Let’s examine Pendragon’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

Check out our latest analysis for Pendragon

Is Pendragon still cheap?

According to my valuation model, the stock is currently overvalued by about 26%, trading at UK£0.18 compared to my intrinsic value of £0.15. This means that the opportunity to buy Pendragon at a good price has disappeared! Furthermore, Pendragon’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. If you believe the share price should eventually reach its true value, a low beta could suggest it is unlikely to rapidly do so anytime soon, and once it’s there, it may be hard to fall back down into an attractive buying range.

Can we expect growth from Pendragon?

earnings-and-revenue-growth
LSE:PDG Earnings and Revenue Growth May 27th 2021

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. With revenues expected to grow by 33% over the next couple of years, the future seems bright for Pendragon. If the level of expenses is able to be maintained, 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? PDG’s optimistic future growth appears to have been factored into the current share price, with shares trading above its fair value. However, this brings up another question – is now the right time to sell? If you believe PDG should trade below its current price, selling high and buying it back up again when its price falls towards its real value can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on PDG for some time, now may not be the best time to enter into the stock. The price has surpassed its true value, which means there’s no upside from mispricing. However, the positive outlook is encouraging for PDG, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. While conducting our analysis, we found that Pendragon has 1 warning sign and it would be unwise to ignore it.

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