Is Skyworth Group Limited (HKG:751) Potentially Undervalued?

Skyworth Group Limited (HKG:751), is not the largest company out there, but it saw a significant share price rise of over 20% in the past couple of months on the SEHK. As a HK$16b market-cap stock, it seems odd Skyworth Group is not more well-covered by analysts. However, this is not necessarily a bad thing given that there are less eyes on the stock to push it closer to fair value. Is there still an opportunity to buy? Let’s take a look at Skyworth Group’s outlook and value based on the most recent financial data to see if the opportunity still exists.

View our latest analysis for Skyworth Group

Is Skyworth 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 7.89x is currently trading slightly above its industry peers’ ratio of 7.89x, which means if you buy Skyworth Group today, you’d be paying a relatively sensible price for it. And if you believe that Skyworth Group should be trading at this level in the long run, then there should only be a fairly immaterial downside vs other industry peers. Although, there may be an opportunity to buy in the future. This is because Skyworth Group’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, the company’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.

What does the future of Skyworth Group look like?

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. 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. Though in the case of Skyworth Group, it is expected to deliver a negative earnings growth of -15%, which doesn’t help build up its investment thesis. It appears that risk of future uncertainty is high, at least in the near term.

What this means for you:

Are you a shareholder? 751 seems priced close to industry peers right now, 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 751, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on 751 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. In addition to this, 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 gel your views on 751 should the price fluctuate below the industry PE ratio.

So while earnings quality is important, it's equally important to consider the risks facing Skyworth Group at this point in time. At Simply Wall St, we found 2 warning signs for Skyworth Group and we think they deserve your attention.

If you are no longer interested in Skyworth 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.