Seafarms Group Limited (ASX:SFG), a AUDA$85.62M small-cap, operates in the consumer staples sector, which has been a consistent performer over time due to its robust consumer demand throughout economic cycles. Consumer staple analysts are forecasting for the entire industry, negative growth in the upcoming year , and a single-digit 7.72% growth over the next couple of years. This rate is below the growth rate of the Australian stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether Seafarms Group is lagging or leading in the industry. See our latest analysis for Seafarms Group
What’s the catalyst for Seafarms Group’s sector growth?
Disruption from consumers is becoming more prominent than that of industry competitors. Many consumers now prefer to buy whole, raw ingredients and prepare more of their meals at home. Additionally, new companies with unique business models have emerged in the wake of this healthier food trend. Over the past year, the industry saw growth in the teens, beating the Australian market growth of 6.82%. Seafarms Group 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 Seafarms Group may be trading cheaper than its peers.
Is Seafarms Group and the sector relatively cheap?
Food product companies are typically trading at a PE of 12x, below the broader Australian stock market PE of 18x. This means the industry, on average, is relatively undervalued compared to the wider market – a potential mispricing opportunity here! Furthermore, the industry returned a higher 15.25% compared to the market’s 11.89%, making it a potentially attractive sector. Since Seafarms Group’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Seafarms Group’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Seafarms Group 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 Seafarms Group as part of your portfolio. However, if you’re relatively concentrated in food product, you may want to value Seafarms Group based on its cash flows to determine if it is overpriced based on its current growth outlook.