Drake Resources Limited (ASX:DRK), a AUDA$5.00M small-cap, is a metals and mining operating in an industry which is sensitive to changes in the business cycle, as it supplies materials for construction 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 Drake Resources is lagging or leading in the industry. View our latest analysis for Drake Resources
What’s the catalyst for Drake Resources’s sector growth?
Overall, the basic materials sector seems to be predominantly mature in terms of its industry life cycle. Companies appear to be vastly competitive and consolidation seems to be a natural trend. 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 of 7.36%, beating the Australian market growth of 6.90%. Drake 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 Drake Resources may be trading cheaper than its peers.
Is Drake Resources and the sector relatively cheap?
The metals and mining industry is trading at a PE ratio of 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 Drake Resources’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Drake 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? Drake Resources recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto Drake Resources as part of your portfolio. However, if you’re relatively concentrated in metals and mining, you may want to value Drake Resources based on its cash flows to determine if it is overpriced based on its current growth outlook.