Is Soken Chemical & Engineering Co., Ltd. (TYO:4972) Potentially Undervalued?

While Soken Chemical & Engineering Co., Ltd. (TYO:4972) might not be the most widely known stock at the moment, it saw a significant share price rise of over 20% in the past couple of months on the JASDAQ. Less-covered, small caps tend to present 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? Today I will analyse the most recent data on Soken Chemical & Engineering’s outlook and valuation to see if the opportunity still exists.

See our latest analysis for Soken Chemical & Engineering

What's the opportunity in Soken Chemical & Engineering?

Good news, investors! Soken Chemical & Engineering is still a bargain right now according to my price multiple model, which compares the company's price-to-earnings ratio to the industry average. 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 Soken Chemical & Engineering’s ratio of 6.49x is below its peer average of 15.98x, which indicates the stock is trading at a lower price compared to the Chemicals industry. What’s more interesting is that, Soken Chemical & Engineering’s share price is quite stable, which could mean two things: firstly, it may take the share price a while to move closer to its industry peers, and secondly, there may be less chances to buy low in the future once it reaches that value. This is because the stock is less volatile than the wider market given its low beta.

Can we expect growth from Soken Chemical & Engineering?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. However, with an extremely negative double-digit change in profit expected over the next couple of years, near-term growth is certainly not a driver of a buy decision. It seems like high uncertainty is on the cards for Soken Chemical & Engineering, at least in the near future.

What this means for you:

Are you a shareholder? Although 4972 is currently trading below the industry PE ratio, the negative profit outlook does bring on some uncertainty, which equates to higher risk. I recommend you think about whether you want to increase your portfolio exposure to 4972, or whether diversifying into another stock may be a better move for your total risk and return.

Are you a potential investor? If you’ve been keeping an eye on 4972 for a while, but hesitant on making the leap, I recommend you research further into the stock. Given its current price multiple, now is a great time to make a decision. But keep in mind the risks that come with negative growth prospects in the future.

With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, we've found that Soken Chemical & Engineering has 2 warning signs (1 is potentially serious!) that deserve your attention before going any further with your analysis.

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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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