Smurfit Kappa Group plc (ISE:SK3) is considered a high growth stock. However its last closing price of €35.2 left investors wondering whether this growth has already been factored into the share price. Let’s look into this by assessing SK3’s expected growth over the next few years. Check out our latest analysis for Smurfit Kappa Group
What can we expect from Smurfit Kappa Group in the future?Investors in Smurfit Kappa Group have been patiently waiting for the uptick in earnings. If you believe the analysts covering the stock then the following year will be very interesting. Expectations from 11 analysts are certainly positive with earnings per share estimated to surge from current levels of €1.772 to €2.521 over the next three years. This results in an annual growth rate of 12.14%, on average, which illustrates an optimistic outlook in the near term.
Is SK3 available at a good price after accounting for its growth?
As the legendary value investor Ben Graham once said, “Price is what you pay, value is what you get.” Smurfit Kappa Group is trading at price-to-earnings (PE) ratio of 19.87x, which tells us the stock is overvalued based on current earnings compared to the packaging industry average of 18.23x , and overvalued compared to the IE market average ratio of 14.83x .
We understand SK3 seems to be overvalued based on its current earnings, compared to its industry peers. However, to properly examine the value of a high-growth stock such as Smurfit Kappa Group, 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 19.87x and expected year-on-year earnings growth of 12.14% give Smurfit Kappa Group a higher PEG ratio of 1.64x. This tells us that when we include its growth in our analysis Smurfit Kappa Group’s stock can be considered a bit overvalued , based on the fundamentals.
What this means for you:
SK3’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not 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 urge you to complete your research by taking a look at the following:
- Financial Health: Is SK3’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 SK3 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 SK3’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.