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Is Beacon Lighting Group Limited (ASX:BLX) Potentially Undervalued?

·4-min read

Beacon Lighting Group Limited (ASX:BLX), is not the largest company out there, but it received a lot of attention from a substantial price movement on the ASX over the last few months, increasing to AU$2.85 at one point, and dropping to the lows of AU$1.86. 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 Beacon Lighting Group's current trading price of AU$1.86 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 Beacon Lighting Group’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

View our latest analysis for Beacon Lighting Group

What's the opportunity in Beacon Lighting 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 10.92x is currently trading slightly above its industry peers’ ratio of 8.69x, which means if you buy Beacon Lighting Group today, you’d be paying a relatively reasonable price for it. And if you believe Beacon Lighting Group should be trading in this range, then there isn’t really any room for the share price grow beyond the levels of other industry peers over the long-term. So, is there another chance to buy low in the future? Given that Beacon Lighting Group’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 does the future of Beacon Lighting Group look like?

earnings-and-revenue-growth
earnings-and-revenue-growth

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. 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 a negative profit growth of -8.0% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Beacon Lighting Group. This certainty tips the risk-return scale towards higher risk.

What this means for you:

Are you a shareholder? BLX 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 beneficial for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on BLX, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on BLX for a while, now may not be the most advantageous 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 BLX should the price fluctuate below the industry PE ratio.

With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 3 warning signs for Beacon Lighting Group you should be mindful of and 1 of them is a bit unpleasant.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.