Stellar Diamonds plc (LON:STEL) And The Basic Materials Sector Outlook 2018
Stellar Diamonds plc (AIM:STEL), a £1.46M small-cap, is a metals and mining operating in an 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, a positive double-digit growth of 19.42% in the upcoming year , and a massive growth of 35.12% over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the UK stock market as a whole. Below, I will examine the sector growth prospects, and also determine whether Stellar Diamonds is a laggard or leader relative to its basic materials sector peers. See our latest analysis for Stellar Diamonds
What’s the catalyst for Stellar Diamonds’s sector growth?
Altogether the basic materials sector seems like it has reached maturity in its life cycle. Companies appear to be highly competitive and consolidation seems to be a common theme. 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 past year, the industry delivered growth in the thirties, beating the UK market growth of 12.03%. Stellar Diamonds 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 Stellar Diamonds may be trading cheaper than its peers.
Is Stellar Diamonds and the sector relatively cheap?
Metals and mining companies are typically trading at a PE of 14x, in-line with the UK stock market PE of 18.5x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. Furthermore, the industry returned a similar 11.26% on equities compared to the market’s 12.78%. Since Stellar Diamonds’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Stellar Diamonds’s value is to assume the stock should be relatively in-line with its industry.
Next Steps:
Stellar Diamonds recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If the stock has been on your watchlist for a while, now may be the time to buy, if you like its ability to deliver growth and are not highly concentrated in the materials industry. However, before you make a decision on the stock, I suggest you look at Stellar Diamonds’s fundamentals in order to build a holistic investment thesis.
1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Historical Track Record: What has STEL’s performance been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Stellar Diamonds? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
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.
