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At AU$5.33, Is Downer EDI Limited (ASX:DOW) Worth Looking At Closely?

Simply Wall St
·3 min read

Downer EDI Limited (ASX:DOW), might not be a large cap stock, but it received a lot of attention from a substantial price increase on the ASX over the last few months. With many analysts covering the mid-cap stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. However, could the stock still be trading at a relatively cheap price? Today I will analyse the most recent data on Downer EDI’s outlook and valuation to see if the opportunity still exists.

View our latest analysis for Downer EDI

What's the opportunity in Downer EDI?

The stock is currently trading at AU$5.33 on the share market, which means it is overvalued by 38% compared to my intrinsic value of A$3.85. Not the best news for investors looking to buy! But, is there another opportunity to buy low in the future? Given that Downer EDI’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 another chance to buy in the future. This is based on its high beta, which is a good indicator for share price volatility.

What does the future of Downer EDI 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. 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. However, with a relatively muted revenue growth of 9.1% expected over the next couple of years, growth doesn’t seem like a key driver for a buy decision for Downer EDI, at least in the short term.

What this means for you:

Are you a shareholder? DOW’s future growth appears to have been factored into the current share price, with shares trading above its fair value. At this current price, shareholders may be asking a different question – should I sell? If you believe DOW should trade below its current price, selling high and buying it back up again when its price falls towards its real value can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on DOW for a while, now may not be the best time to enter into the stock. The price has surpassed its true value, which means there’s no upside from mispricing. However, the positive outlook means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

So while earnings quality is important, it's equally important to consider the risks facing Downer EDI at this point in time. Our analysis shows 2 warning signs for Downer EDI (1 doesn't sit too well with us!) and we strongly recommend you look at them before investing.

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

This article by Simply Wall St is general in nature. 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.

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