Sumitomo Electric Industries (TSE:5802) Could Be 34% Undervalued Following Earnings And Guidance Update

Why Sumitomo Electric Industries Stock Is Back in Focus

Sumitomo Electric Industries (TSE:5802) is drawing attention after its latest earnings release showed higher year over year sales and net income, along with refreshed full year guidance and lower dividend projections for the current fiscal year.

See our latest analysis for Sumitomo Electric Industries.

The recent guidance update and dividend reset have come after a sharp 30 day share price return decline of 22.94%. Sumitomo Electric Industries still shows a year to date share price return of 30.19%, and a five year total shareholder return that is several times the starting value. Short term momentum has cooled, while the very long term total shareholder return track record remains strong.

If this kind of volatility has you thinking about where else capital intensive electrification and infrastructure themes might lead, it could be worth scanning 35 power grid technology and infrastructure stocks

Bulls point to Sumitomo Electric Industries' higher guidance and earnings, while bears focus on the sharply lower dividend and recent share price slide. The key question is which story the current valuation actually supports next.

Preferred P/E of 18.4x for Sumitomo Electric Industries: Is it justified?

On the latest figures, Sumitomo Electric Industries trades on a P/E of 18.4x. That sits above both its peer group average of 15.9x and the broader JP Auto Components industry average of 10x. The market is therefore paying a higher price for each unit of current earnings compared with many competitors.

The P/E multiple compares the current share price with earnings per share and is a quick way to see how richly or cheaply a company is valued against its profits. For a diversified industrial group like Sumitomo Electric Industries, with exposure to automotive, environment and energy, infocommunications and industrial materials, this metric is often used as a shorthand for how the market views the quality, durability and growth profile of its earnings.

There are mixed signals around this 18.4x P/E. On one hand, the stock is described as expensive relative to both its direct peers at 15.9x and the wider JP Auto Components industry at 10x, which points to a premium valuation. On the other hand, the same data indicates Sumitomo Electric Industries screens as good value when that 18.4x P/E is compared with an estimated fair P/E of 30.6x from the SWS fair ratio framework. This indicates that the current market multiple sits well below the level that model associates with its earnings and business characteristics under the fair ratio assumptions.

The gap between the current 18.4x P/E and the 30.6x fair P/E is sizeable, so this fair ratio highlights a potentially meaningful re rating rather than just a small adjustment. It frames today’s valuation as sitting at a discount to the level the fair ratio model indicates may be appropriate, even though the stock still carries a premium to peers on simple comparisons.

Explore the SWS fair ratio for Sumitomo Electric Industries

Result: Price-to-earnings of 18.4x (UNDERVALUED)

However, investors still face risks if the dividend reset hurts sentiment further or if Sumitomo Electric Industries' capital intensive projects strain cash flows and margins.

Find out about the key risks to this Sumitomo Electric Industries narrative.

Another View on Sumitomo Electric Industries' Value

Alongside the P/E discussion, the SWS DCF model puts Sumitomo Electric Industries' fair value at ¥2,921.86 per share. That sits above the current price of ¥2,184, which frames the stock as undervalued on this cash flow view. The question is how much confidence you place in those long range assumptions.

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Sumitomo Electric Industries for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 18 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With Sumitomo Electric Industries showing both concerns and positives, it may be useful to review the details yourself before opinions harden. To see how the balance of risks and rewards compares in one place, review the 3 key rewards and 1 important warning sign

Looking for more investment ideas beyond Sumitomo Electric Industries?

If Sumitomo Electric Industries has sharpened your focus on valuation and quality, it makes sense to keep building a watchlist of other candidates now rather than later.

• Spot potential value outliers early and review companies that currently stand out on price and quality using the 18 high quality undervalued stocks.
• Strengthen your portfolio core by assessing companies that show resilient finances through the solid balance sheet and fundamentals stocks screener (37 results).
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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