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CMC Materials, Inc. (NASDAQ:CCMP), is not the largest company out there, but it received a lot of attention from a substantial price increase on the NASDAQGS over the last few months. As a mid-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could the stock still be trading at a relatively cheap price? Let’s examine CMC Materials’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
What's the opportunity in CMC Materials?
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 39.35x is currently trading slightly above its industry peers’ ratio of 39.09x, which means if you buy CMC Materials today, you’d be paying a relatively reasonable price for it. And if you believe that CMC Materials should be trading at this level in the long run, then there should only be a fairly immaterial downside vs other industry peers. Is there another opportunity to buy low in the future? Since CMC Materials’s share price is quite volatile, we could potentially see it sink lower (or rise higher) in the future, giving us another chance to buy. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.
Can we expect growth from CMC Materials?
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. CMC Materials' earnings over the next few years are expected to increase by 49%, indicating a highly optimistic future ahead. This should lead to more robust cash flows, feeding into a higher share value.
What this means for you:
Are you a shareholder? CCMP’s optimistic future growth appears to have been factored into the current share price, with shares trading around industry price multiples. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at CCMP? Will you have enough conviction to buy should the price fluctuate below the industry PE ratio?
Are you a potential investor? If you’ve been keeping an eye on CCMP, now may not be the most advantageous time to buy, given it is trading around industry price multiples. However, the positive outlook is encouraging for CCMP, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.
In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. At Simply Wall St, we found 1 warning sign for CMC Materials and we think they deserve your attention.
If you are no longer interested in CMC Materials, 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.
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