Yulong Eco-Materials Limited (NASDAQ:YECO), a USD$6.57M small-cap, operates in the basic materials industry, which supplies materials for construction. This means it is highly sensitive to changes in the economic cycle, a key driver of building activities. Basic material analysts are forecasting for the entire industry, an extremely elevated growth of 33.92% in the upcoming year , and a whopping growth of 44.77% over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the US stock market as a whole. Below, I will examine the sector growth prospects, as well as evaluate whether Yulong Eco-Materials is lagging or leading in the industry. See our latest analysis for Yulong Eco-Materials
What’s the catalyst for Yulong Eco-Materials’s sector growth?
Overall, the basic materials sector seems like it has reached maturity in its life cycle. Companies appear to be vastly competitive and consolidation seems to be a natural trend. 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 of 1.79%, though still underperforming the wider US stock market. Yulong Eco-Materials 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 Yulong Eco-Materials may be trading cheaper than its peers.
Is Yulong Eco-Materials and the sector relatively cheap?
The construction materials sector’s PE is currently hovering around 22x, in-line with the US stock market PE of 20x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. Furthermore, the industry returned a similar 8.58% on equities compared to the market’s 10.47%. Since Yulong Eco-Materials’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Yulong Eco-Materials’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Yulong Eco-Materials recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto Yulong Eco-Materials as part of your portfolio. However, if you’re relatively concentrated in construction material, you may want to value Yulong Eco-Materials based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If Yulong Eco-Materials has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the construction material industry. Before you make a decision on the stock, take a look at Yulong Eco-Materials’s cash flows and assess whether the stock is trading at a fair price.
For a deeper dive into Yulong Eco-Materials’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other basic materials stocks instead? Use our free playform to see my list of over 2000 other basic materials companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.