Alloy Resources Limited (ASX:AYR), a AUDA$5.07M 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 highly optimistic growth of 32.94% in the upcoming year , and a massive growth of 39.25% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. In this article, I’ll take you through the sector growth expectations, as well as evaluate whether Alloy Resources is lagging or leading in the industry. View our latest analysis for Alloy Resources
What’s the catalyst for Alloy Resources’s sector growth?
Overall, the basic materials sector seems like it has reached maturity in its life cycle. Companies appear to be vastly competitive and consolidation seems to be a common theme. There are plenty of emerging trends to deal with across the board including the reduction of waste, raw material inflation, and innovation in global supply chain management. In the previous year, the industry saw growth of 7.36%, beating the Australian market growth of 6.90%. Alloy Resources 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 Alloy Resources may be trading cheaper than its peers.
Is Alloy Resources and the sector relatively cheap?
The metals and mining sector’s PE is currently hovering around 15x, relatively similar to the rest of the Australian stock market PE of 18x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. Furthermore, the industry returned a similar 10.35% on equities compared to the market’s 11.87%. Since Alloy Resources’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Alloy Resources’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Alloy Resources’s track record in earnings growth shows that it has been able to keep up with its peers. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto Alloy Resources as part of your portfolio. However, if you’re relatively concentrated in materials, you may want to value Alloy Resources based on its cash flows to determine if it is overpriced based on its current growth outlook.