Rainbow Rare Earths Limited (LSE:RBW), a GBP£24.16M small-cap, operates in the basic materials industry which is sensitive to changes in the business cycle, as it supplies materials for construction activities. Basic material analysts are forecasting for the entire industry, a positive double-digit growth of 23.50% in the upcoming year , and an enormous growth of 39.19% over the next couple of years. This rate is larger than the growth rate of the UK stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether RBW is lagging or leading in the industry. View our latest analysis for Rainbow Rare Earths
What’s the catalyst for RBW’s sector growth?
Altogether the basic materials sector seems like it has reached maturity in its life cycle. Companies appear to be highly competitive and consolidation seems to be a common theme. However, the industry is still facing many emerging trends including the reduction of waste, raw material inflation, and innovation in global supply chain management. In the previous year, the industry saw growth in the thirties, beating the UK market growth of 11.30%. RBW lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means RBW may be trading cheaper than its peers.
Is RBW and the sector relatively cheap?
The metals and mining sector’s PE is currently hovering around 14x, in-line with the UK stock market PE of 19x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a lower 9.36% compared to the market’s 12.78%, potentially indicative of past headwinds. Since RBW’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge RBW’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? RBW has been a metals and mining industry laggard in the past year. If your initial investment thesis is around the growth prospects of RBW, there are other metals and mining companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how RBW fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If RBW has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its metals and mining peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at RBW’s future cash flows in order to assess whether the stock is trading at a reasonable price.