Is It Time To Consider Buying First Derivatives plc (LON:FDP)?

While First Derivatives plc (LON:FDP) might not be the most widely known stock at the moment, it received a lot of attention from a substantial price movement on the AIM over the last few months, increasing to UK£35.20 at one point, and dropping to the lows of UK£27.00. 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 First Derivatives' current trading price of UK£29.20 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 First Derivatives’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

View our latest analysis for First Derivatives

Is First Derivatives still cheap?

First Derivatives appears to be expensive according to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and 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 First Derivatives’s ratio of 55.24x is above its peer average of 43.19x, which suggests the stock is trading at a higher price compared to the Software industry. In addition to this, it seems like First Derivatives’s share price is quite stable, which could mean two things: firstly, it may take the share price a while to fall back down to an attractive buying range, and secondly, there may be less chances to buy low in the future once it reaches that value. This is because the stock is less volatile than the wider market given its low beta.

What does the future of First Derivatives 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 profit expected to grow by 27% over the next couple of years, the future seems bright for First Derivatives. 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? FDP’s optimistic future growth appears to have been factored into the current share price, with shares trading above industry price multiples. However, this brings up another question – is now the right time to sell? If you believe FDP should trade below its current price, selling high and buying it back up again when its price falls towards the industry PE ratio 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 an eye on FDP for a while, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the positive outlook is encouraging for FDP, which means it’s worth diving deeper into other factors 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 First Derivatives at this point in time. While conducting our analysis, we found that First Derivatives has 2 warning signs and it would be unwise to ignore them.

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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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