Air China Limited (HKG:753) closed yesterday at HK$9.06, which left some investors asking whether the high earnings potential can still be justified at this price. Let’s look into this by assessing 753’s expected growth over the next few years.
What are the future expectations?
If you are bullish about Air China’s growth potential then you are certainly not alone. The consensus forecast from 19 analysts is extremely positive with earnings per share estimated to rise from today’s level of CN¥0.543 to CN¥1.019 over the next three years. On average, this leads to a growth rate of 21% each year, which signals a market-beating outlook in the upcoming years.
Is 753’s share price justifiable by its earnings growth?
Air China is trading at quite low price-to-earnings (PE) ratio of 14.31x. This tells us the stock is overvalued compared to the HK market average ratio of 11.99x , and overvalued based on current earnings compared to the Airlines industry average of 12.47x .
We already know that 753 appears to be overvalued when compared to its industry average. But, to properly examine the value of a high-growth stock such as Air China, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 14.31x and expected year-on-year earnings growth of 21% give Air China a very low PEG ratio of 0.67x. This means that, when we account for Air China’s growth, the stock can be viewed as relatively cheap , based on fundamental analysis.
What this means for you:
753’s current undervaluation could signal a potential buying opportunity to increase your exposure to the stock, or it you’re a potential investor, now may be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Are 753’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has 753 been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of 753’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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