Is Franchise Group, Inc. (NASDAQ:FRG) Potentially Undervalued?

Franchise Group, Inc. (NASDAQ:FRG), might not be a large cap stock, but it received a lot of attention from a substantial price movement on the NASDAQGM over the last few months, increasing to US$44.39 at one point, and dropping to the lows of US$35.12. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Franchise Group's current trading price of US$35.12 reflective of the actual value of the small-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Franchise Group’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

See our latest analysis for Franchise Group

What's the opportunity in Franchise Group?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 6.32x is currently trading slightly below its industry peers’ ratio of 10.79x, which means if you buy Franchise Group today, you’d be paying a reasonable price for it. And if you believe that Franchise Group should be trading at this level in the long run, then there’s not much of an upside to gain over and above other industry peers. Is there another opportunity to buy low in the future? Since Franchise Group’s share price is quite volatile, we could potentially see it sink lower (or rise higher) in the future, giving us another chance to buy. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

What does the future of Franchise Group look like?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. 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 Franchise Group, it is expected to deliver a negative earnings growth of -2.4%, 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? FRG seems priced close to industry peers right now, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on FRG, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on FRG 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 FRG should the price fluctuate below the industry PE ratio.

So while earnings quality is important, it's equally important to consider the risks facing Franchise Group at this point in time. For instance, we've identified 4 warning signs for Franchise Group (1 is significant) you should be familiar with.

If you are no longer interested in Franchise Group, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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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.