Is Suzumo Machinery Company Limited (TYO:6405) Potentially Undervalued?

Suzumo Machinery Company Limited (TYO:6405), is not the largest company out there, but it saw a decent share price growth in the teens level on the JASDAQ over the last few months. Less-covered, small caps sees more of an opportunity for mispricing due to the lack of information available to the public, which can be a good thing. So, could the stock still be trading at a low price relative to its actual value? Let’s examine Suzumo Machinery’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

See our latest analysis for Suzumo Machinery

Is Suzumo Machinery 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. 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 Suzumo Machinery’s ratio of 21.65x is trading slightly above its industry peers’ ratio of 17.37x, which means if you buy Suzumo Machinery today, you’d be paying a relatively sensible price for it. And if you believe Suzumo Machinery should be trading in this range, then there isn’t really any room for the share price grow beyond the levels of other industry peers over the long-term. Furthermore, it seems like Suzumo Machinery’s share price is quite stable, which means there may be less chances to buy low in the future now that it’s priced similarly to industry peers. This is because the stock is less volatile than the wider market given its low beta.

What does the future of Suzumo Machinery 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 Suzumo Machinery, it is expected to deliver a negative earnings growth of -4.2%, 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? Currently, 6405 appears to be trading around industry price multiples, but given the uncertainty from negative returns in the future, this could be the right time to de-risk your portfolio. Is your current exposure to the stock beneficial for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on 6405, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on 6405 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. Furthermore, 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 6405 should the price fluctuate below the industry PE ratio.

Diving deeper into the forecasts for Suzumo Machinery mentioned earlier will help you understand how analysts view the stock going forward. At Simply Wall St, we have the analysts estimates which you can view by clicking here.

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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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