Echo Resources Limited (ASX:EAR), a AUDA$141.71M 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 strong double-digit growth of 29.79% in the upcoming year , and a whopping growth of 36.64% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether Echo Resources is lagging or leading in the industry. Check out our latest analysis for Echo Resources
What’s the catalyst for Echo Resources’s sector growth?
As a whole, 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. 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 previous year, the industry saw growth of 6.76%, though still underperforming the wider Australian stock market. Echo Resources lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its metals and mining peers. However, the future seems brighter, as analysts expect an industry-beating growth rate of 82.93% in the upcoming year.
Is Echo Resources and the sector relatively cheap?
The metals and mining industry is trading at a PE ratio of 15x, in-line with 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 10.53% on equities compared to the market’s 11.92%. Since Echo Resources’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Echo 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? Echo Resources’s industry-beating future is a positive for shareholders, indicating they’ve backed a fast-growing horse. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto Echo Resources as part of your portfolio. However, if you’re relatively concentrated in metals and mining, you may want to value Echo Resources based on its cash flows to determine if it is overpriced based on its current growth outlook.