Ferroglobe: Weather the commodity price spike with this undervalued stock (NASDAQ: GSM)
One of my favorite methods for reviewing and analyzing stocks is the peer comparison method. Although it doesn’t give the user a complete picture of the business, I find that by using the right tools, they can serve as an excellent initial starting point for analyzing a company’s price attractiveness relative to the market and determining which stocks warrant further investigation. Combine that with a review of the company’s financial health, before researching the best pricing mechanisms for the company, and you get a pretty comprehensive “first look” at a company.
One company that has popped up on my radar for all the right reasons is Ferroglobe PLC (NASDAQ: GSM). GSM has underperformed the broader market for the past 5 years, but in this article we will try to find out if the company has recently been mispriced and whether there is an opportunity for investors to discover. .
Ferroglobe supplies silicone chemicals which are used in a range of applications such as drugs, cosmetics and shampoos. Silicon is a key component in electronics and is expected to be a strong growth market over the next decade. Additionally, Ferroglobe has just announced plans to reopen a South African plant to meet growing global demand, adding significant production capacity.
We’ll compare GSM to the “All US Stocks” filter on Seeking Alpha, which includes 2,462 of the largest US stocks in the market.
(Data and prices correct as of November 5, 2022 before release. The “All US stocks” list mentioned in this article is on this Seeking Alpha filter.)
Basic financial health of Ferroglobe
To begin any analysis, we begin by reviewing the financial health of the business and assessing the balance sheet.
Overall, there are very few areas of concern for GSM. The company carries a reasonably moderate level of debt relative to the comparator group, has above-average margins and excellent revenue and earnings prospects (noting that the company has operated with a loss of EPS until has recently).
Averaging the company scores and applying weightings, we find that GSM achieves an excellent overall financial health score of 97.5%.
Next, we look at the company’s valuation metrics to get a basic view of GSM’s current price attractiveness.
Evaluation of Ferroglobe’s price attractiveness
Overall, GSM’s current pricing appears to present an excellent buying opportunity for investors, with an average score of 85.25%, and when weights are applied, an overall weighted score of 83.35%.
It should be noted that this is not a valuation method for GSM, but rather an overview of how the company’s pricing metrics stack up against the comparator group.
Find a suitable valuation method for Ferroglobe
We first look at a list of standard and non-standard valuation metrics to get a good overall idea of a potential valuation for the business. We then look at how each metric rates the overall market (looking at metric change, P/S correlation, and market cap correlation).
By narrowing our view to only the “quieter” metrics with lower variation, we see a shortlist of suitable evaluation metrics to take a closer look at.
This method leaves us with the impression that GSM is significantly undervalued relative to the All US Stocks list, thanks to a healthy balance sheet and strong recent financial performance, along with a bumper revenue and earnings outlook.
With a comprehensive first look at GSM, we feel the company presents a solid buying opportunity for investors.
That said, it would be irresponsible of me not to point out that this analysis is limited in scope to mere quantitative peer review. Although we review the company’s financial statements, we do not seek the detail and context that one might find by reading the earnings transcripts. Also, the analysis looks at the market as a whole, but does not take into account the specific industry in which the company operates and does not break down a close peer comparison. Investors should use this analysis as a baseline for their analysis, but spend time looking at the qualitative aspects of the business to further inform their thinking.