In This Article:
Energy One Limited (ASX:EOL), is not the largest company out there, but it saw a decent share price growth in the teens level on the ASX 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 Energy One’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
View our latest analysis for Energy One
What's the opportunity in Energy One?
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 41.2x is currently trading slightly below its industry peers’ ratio of 43.96x, which means if you buy Energy One today, you’d be paying a reasonable price for it. And if you believe that Energy One 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. So, is there another chance to buy low in the future? Given that Energy One’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.
What kind of growth will Energy One generate?
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. Energy One's earnings over the next few years are expected to increase by 75%, indicating a highly optimistic future ahead. This should lead to more robust cash flows, feeding into a higher share value.
What this means for you:
Are you a shareholder? EOL’s optimistic future growth appears to have been factored into the current share price, with shares trading around industry price multiples. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at EOL? Will you have enough conviction to buy should the price fluctuate below the industry PE ratio?