Escalade, Incorporated (NASDAQ:ESCA), might not be a large cap stock, but it received a lot of attention from a substantial price movement on the NASDAQGM over the last few months, increasing to US$23.82 at one point, and dropping to the lows of US$18.15. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Escalade's current trading price of US$19.64 reflective of the actual value of the small-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Escalade’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.
Is Escalade still cheap?
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 9.36x is currently trading slightly below its industry peers’ ratio of 13.75x, which means if you buy Escalade today, you’d be paying a decent price for it. And if you believe Escalade should be trading in this range, then there isn’t much room for the share price to grow beyond the levels of other industry peers over the long-term. So, is there another chance to buy low in the future? Given that Escalade’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 an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.
What kind of growth will Escalade generate?
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 negative profit growth of -18% expected next year, near-term growth certainly doesn’t appear to be a driver for a buy decision for Escalade. This certainty tips the risk-return scale towards higher risk.
What this means for you:
Are you a shareholder? Currently, ESCA appears to be trading around industry price multiples, 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 ESCA, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping tabs on ESCA for a while, now may not be the most advantageous time to buy, given it is trading around industry price multiples. This 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 crystallize your views on ESCA should the price fluctuate below the industry PE ratio.
So while earnings quality is important, it's equally important to consider the risks facing Escalade at this point in time. For example - Escalade has 2 warning signs we think you should be aware of.
If you are no longer interested in Escalade, 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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