Dunelm Group plc (LON:DNLM) may not be a large-cap stock, but it’s garnered a lot of attention with significant price action on the LSE in recent months, rising to £8.97 at one point and then back to £8. 97 British pounds fell from the UK lows of 6.88 pounds. Some stock price movements may present investors with a better opportunity to get into the stock and potentially buy it at a lower price. One question to be answered is does Dunelm Group’s current trading price of £6.88 reflect the true value of the small-cap? Or is it currently undervalued and presenting us with an opportunity to buy? Let’s take a look at the Dunelm Group’s prospects and value based on the latest financial data to see if there are any catalysts for a price change.
Check out our latest analysis for the Dunelm Group
What is the Dunelm Group worth?
Based on my price multiple model, which compares the company’s price-to-earnings ratio to the industry average, the stock price appears justified. In this case, I used the price-to-earnings (P/E) ratio because there isn’t enough information to reliably predict the stock’s cash flows. I find Dunelm Group’s ratio of 9.13x is trading slightly above its industry peers’ ratio of 8.14x, meaning that if you bought Dunelm Group today, you would be paying a relatively reasonable price. And if you think Dunelm Group should trade in this range, then over the long term there is no room for the share price to grow above the levels of other industry peers. Will there be another opportunity to shop cheaply in the future? As the Dunelm Group share price is quite volatile, it could potentially go lower (or rise higher) in the future, giving us another buying opportunity. This is based on its high beta, which is a good indicator of how much the stock is moving relative to the rest of the market.
What kind of growth will Dunelm Group generate?
Future prospects are an important consideration when looking to buy a stock, especially if you’re an investor looking for growth in your portfolio. Although value investors would argue that intrinsic value relative to price matters most, a more compelling investment thesis would be high growth potential at a bargain price. However, with negative earnings growth of -8.3% expected over the next few years, the short-term growth certainly doesn’t seem to be a reason to buy Dunelm Group. This certainty tilts the risk-reward scale towards higher risk.
What that means for you
Are you a shareholder? Currently, DNLM appears to be trading around industry price multiples, but with the uncertainty of negative returns moving forward, this could be the right time to de-risk your portfolio. Is your current exposure to the stock optimal for your overall portfolio? And is the opportunity cost of owning a stock with a negative outlook too high? Before you commit to DNLM, check to see if its fundamentals have changed.
Are you a potential investor? If you’ve been eyeing DNLM for a while now might not be the best time to buy as these are industry price multiples. This means that there are fewer benefits from miss-prices. In addition, the negative growth outlook increases the risk of holding the stock. However, there are other important factors that we didn’t consider today that can help flesh out your view on DNLM should the price dip below industry P/E.
So while earnings quality is important, it is equally important to consider the risks Dunelm Group is exposed to at this time. For example, the Dunelm Group 2 warning signs (and 1 that doesn’t sit well with us) that we think you should know.
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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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