Earthport plc (AIM:EPO), a it company based in United Kingdom, saw a significant share price rise of over 20% in the past couple of months on the AIM. Less-covered, small caps tend to present 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 Earthport’s valuation and outlook in more detail to determine if there’s still a bargain opportunity. View our latest analysis for Earthport
What’s the opportunity in Earthport?The stock seems fairly valued at the moment according to my relative valuation model. In this instance, I’ve used the price-to-book (PB) ratio given that there is not enough information to reliably forecast the stock’s cash flows, and its earnings doesn’t seem to reflect its true value. I find that Earthport’s ratio of 2.57x is trading slightly below its industry peers’ ratio of 3.05x, which means if you buy Earthport today, you’d be paying a relatively reasonable price for it. And if you believe Earthport should be trading in this range, then there isn’t much room for the share price grow beyond what it’s currently trading. Furthermore, Earthport’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. This may mean it is less likely for the stock to fall lower from natural market volatility, which suggests less opportunities to buy moving forward.
What does the future of Earthport look like?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. With revenues expected to grow by 79.98% over the next couple of years, the future seems bright for Earthport. If the level of expenses is able to be maintained, it looks like higher cash flows is on the cards for the stock, which should feed into a higher share valuation.
What this means for you:
Are you a shareholder? EPO’s optimistic future growth appears to have been factored into the current share price, with shares trading around its fair value. 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 EPO? Will you have enough confidence to invest in the company should the price drop below its fair value?
Are you a potential investor? If you’ve been keeping tabs on EPO, now may not be the most advantageous time to buy, given it is trading around its fair value. However, the positive outlook is encouraging for EPO, 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.
Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Earthport. You can find everything you need to know about Earthport in the latest infographic research report. If you are no longer interested in Earthport, you can use our free platform to see my list of over 50 other stocks with a high growth potential.