Southern Cross Exploration NL (ASX:SXX), a AUDA$9.70M small-cap, operates in the basic materials 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, a highly optimistic 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, as well as evaluate whether Southern Cross Exploration is lagging or leading in the industry. Check out our latest analysis for Southern Cross Exploration
What’s the catalyst for Southern Cross Exploration’s sector growth?
Altogether the basic materials sector seems like it has reached maturity in its life cycle. Companies appear to be highly competitive and consolidation seems to be a inevitable. 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 7.36%, beating the Australian market growth of 6.82%. Southern Cross Exploration 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 Southern Cross Exploration may be trading cheaper than its peers.
Is Southern Cross Exploration 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 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 11.89%. Since Southern Cross Exploration’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Southern Cross Exploration’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Southern Cross Exploration has been a metals and mining industry laggard in the past year. If your initial investment thesis is around the growth prospects of Southern Cross Exploration, there are other metals and mining companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how Southern Cross Exploration fits into your wider portfolio and the opportunity cost of holding onto the stock.