Redstone Resources Limited (ASX:RDS), a AUDA$4.56M small-cap, is a metals and mining operating in an industry which can be affected by shifts in the housing market, as many produced raw materials are components of construction projects. Basic material analysts are forecasting for the entire industry, an extremely robust growth of 32.94% in the upcoming year , and an enormous 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, and also determine whether Redstone Resources is a laggard or leader relative to its basic materials sector peers. Check out our latest analysis for Redstone Resources
What’s the catalyst for Redstone Resources’s sector growth?
As a whole, the basic materials sector seems to be predominantly mature in terms of its industry life cycle. Companies appear to be highly 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. Over the past year, the industry saw growth of 7.36%, beating the Australian market growth of 6.88%. Redstone 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 Redstone Resources may be trading cheaper than its peers.
Is Redstone 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 illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. Furthermore, the industry returned a similar 10.35% on equities compared to the market’s 11.87%. Since Redstone Resources’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Redstone 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? Redstone 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 Redstone Resources as part of your portfolio. However, if you’re relatively concentrated in metals and mining, you may want to value Redstone Resources based on its cash flows to determine if it is overpriced based on its current growth outlook.