Obayashi (TSE:1802) Hits Record Highs—Exploring the Valuation After Defying the Market Downturn

Obayashi (TSE:1802) saw its shares climb to all-time highs, jumping nearly 5% at the close, even as the Nikkei 225 posted a sharp drop. The stock’s rise drew attention, given the broader market’s decline.

See our latest analysis for Obayashi.

Today’s leap caps off months of strong momentum for Obayashi, with a 1-month share price return of 21.34% and an impressive 46.78% gain year-to-date. Zooming out, the total shareholder return has soared 52.91% over the past year and nearly tripled over five years. This signals that investor appetite is far from fading, especially with the latest breakout happening against a falling market backdrop.

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But with Obayashi now trading above analyst price targets and following such a rapid climb, investors are left to wonder if further upside remains or if the market has already factored in all future growth.

Price-to-Earnings of 12.9x: Is it justified?

Obayashi shares are trading at a price-to-earnings (P/E) ratio of 12.9x, which places the valuation above the industry average but below the estimated fair P/E level.

The P/E ratio measures how much investors are paying for each unit of the company’s earnings. In sectors like construction, where profitability and margins can fluctuate due to project cycles, the P/E serves as a barometer for investor expectations of future growth.

With a 12.9x P/E, Obayashi is valued higher than the Japanese construction industry average of 11.8x. This indicates some market optimism around the company’s recent earnings momentum and profitability. However, when compared to the estimated fair P/E of 15.9x and a peer group average of 17.3x, the current valuation is somewhere in the middle. This suggests that while the market is recognizing Obayashi’s growth, there may still be room for further rerating if financial performance is maintained.

Explore the SWS fair ratio for Obayashi

Result: Price-to-Earnings of 12.9x (ABOUT RIGHT)

However, slowing revenue growth and a recent dip in net income suggest caution may be warranted if broader industry headwinds persist.

Find out about the key risks to this Obayashi narrative.

Another View: What Does the DCF Suggest?

Looking at Obayashi’s valuation from another angle, the SWS DCF model indicates the stock is trading well below its calculated fair value. While earnings-based multiples signal caution, the DCF’s substantial fair value gap points to an undervalued opportunity. Is the market missing something, or is caution still warranted?

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 Obayashi 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 926 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 Obayashi Narrative

If you have a different perspective or want to dive into the numbers yourself, it only takes a few minutes to chart your own path. Do it your way.

A great starting point for your Obayashi research is our analysis highlighting 2 key rewards and 3 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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