Subaru (TSE:7270) – Assessing Valuation After Recent Share Price Pullback

Subaru (TSE:7270) shares slipped today, giving back some recent gains as investors continued to digest market dynamics around the automaker. The stock’s performance has attracted attention amid its strong returns over the past year.

See our latest analysis for Subaru.

While Subaru’s latest share price slipped back to ¥3,354, momentum remains impressive. A 21.9% year-to-date share price return highlights strong interest from investors. Over the longer term, total shareholder return has been robust, up 39.4% over the past year as the company steadily delivers value.

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But with recent investor enthusiasm and solid long-term gains, is Subaru’s stock still undervalued at current levels, or are investors already factoring in all of the company’s future growth potential, leaving limited room for upside?

Price-to-Earnings of 9.1x: Is it justified?

Subaru’s Price-to-Earnings (P/E) ratio sits at 9.1x, noticeably lower than the figure seen across peers and the broader market at the recent close of ¥3,354. This signals that the market currently values Subaru’s earnings less generously than its competitors.

The P/E ratio measures how much investors are paying for each yen of Subaru’s earnings. For automakers, this multiple helps gauge investor sentiment, whether they anticipate earnings growing or stalling in the near future. Given Subaru’s position and recent returns, it suggests that the market might be skeptical about the company’s growth trajectory or is underestimating its earnings power.

Compared to other companies in the Japanese auto sector, Subaru’s P/E of 9.1x stands out as attractive. The sector’s average is 18.5x and peers average 13.4x, shining a light on Subaru’s relative affordability. According to regression-based analysis, the fair P/E ratio could be closer to 14.4x, indicating room for a market re-rating if confidence in Subaru’s long-term prospects improves.

Explore the SWS fair ratio for Subaru

Result: Price-to-Earnings of 9.1x (UNDERVALUED)

However, potential risks such as sluggish revenue and net income growth could limit further upside for Subaru shares if these trends continue.

Find out about the key risks to this Subaru narrative.

Another View: What Does the DCF Model Suggest?

While Subaru appears undervalued by standard valuation ratios, our DCF model provides a different perspective. It calculates a fair value of ¥2,332.5, which is well below the current price. This indicates that Subaru might actually be overvalued when considering projected future cash flows. This raises the question of whether investors are placing too much confidence in ongoing performance.

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Subaru for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 929 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Subaru Narrative

If you see Subaru’s story unfolding differently, or want to dig deeper into the numbers, you can easily build your own perspective in just minutes. Do it your way

A great starting point for your Subaru research is our analysis highlighting 3 key rewards and 2 important warning signs that could impact your investment decision.

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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.

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