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Hardwoods Distribution Inc. (TSE:HDI), might not be a large cap stock, but it saw significant share price movement during recent months on the TSX, rising to highs of CA$42.32 and falling to the lows of CA$30.12. 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 Hardwoods Distribution's current trading price of CA$32.85 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 Hardwoods Distribution’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.
What is Hardwoods Distribution worth?
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 4.62x is currently trading slightly below its industry peers’ ratio of 5.08x, which means if you buy Hardwoods Distribution today, you’d be paying a decent price for it. And if you believe that Hardwoods Distribution should be trading at this level in the long run, then there’s not much of an upside to gain over and above other industry peers. Although, there may be an opportunity to buy in the future. This is because Hardwoods Distribution’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, the company’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.
What kind of growth will Hardwoods Distribution generate?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. 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 -2.2% expected next year, near-term growth certainly doesn’t appear to be a driver for a buy decision for Hardwoods Distribution. This certainty tips the risk-return scale towards higher risk.
What this means for you:
Are you a shareholder? Currently, HDI 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 reduce the risk in 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 HDI, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping an eye on HDI 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. Furthermore, 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 HDI should the price fluctuate below the industry PE ratio.
If you'd like to know more about Hardwoods Distribution as a business, it's important to be aware of any risks it's facing. Be aware that Hardwoods Distribution is showing 5 warning signs in our investment analysis and 3 of those don't sit too well with us...
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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.