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Is Science Group plc (LON:SAG) Potentially Undervalued?

Simply Wall St

Science Group plc (LON:SAG), which is in the professional services business, and is based in United Kingdom, received a lot of attention from a substantial price increase on the AIM over the last few months. Less-covered, small caps tend to present 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 take a look at Science Group’s outlook and value based on the most recent financial data to see if the opportunity still exists.

View our latest analysis for Science Group

Is Science Group still cheap?

According to my relative valuation model, the stock seems to be currently fairly priced. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Science Group’s ratio of 22.52x is trading slightly below its industry peers’ ratio of 22.73x, which means if you buy Science Group today, you’d be paying a reasonable price for it. And if you believe that Science Group should be trading at this level in the long run, then there’s not much of an upside to gain from mispricing. Furthermore, it seems like Science Group’s share price is quite stable, which means there may be less chances to buy low in the future now that it’s fairly valued. This is because the stock is less volatile than the wider market given its low beta.

What kind of growth will Science Group generate?

AIM:SAG Past and Future Earnings, January 20th 2020

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. 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 -6.9% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Science Group. This certainty tips the risk-return scale towards higher risk.

What this means for you:

Are you a shareholder? Currently, SAG appears to be trading around its fair value, but given the uncertainty from negative returns in the future, this could be the right time to de-risk your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on SAG, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on SAG for a while, now may not be the most optimal time to buy, given it is trading around its fair value. The stock appears to be trading at fair value, which means there’s less benefit from mispricing. In addition to this, 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 crystalize your views on SAG should the price fluctuate below its true value.

Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Science Group. You can find everything you need to know about Science Group in the latest infographic research report. If you are no longer interested in Science Group, you can use our free platform to see my list of over 50 other stocks with a high growth potential.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.