Sumitomo Metal Mining (TSE:5713): Valuation Check After Leading Japanese Market Gains on Global Optimism

Sumitomo Metal Mining (TSE:5713) jumped 9% on Friday as Asian markets rallied on upbeat Wall Street trading and fresh expectations of China stimulus, putting this materials heavyweight back on many investors watchlists.

See our latest analysis for Sumitomo Metal Mining.

That one day surge caps a powerful run, with a 30 day share price return of 16.25% and a 90 day gain of 37.43%. The 1 year total shareholder return of 67.38% signals momentum is still building rather than fading.

If this rally has you rethinking where the next cyclical winner could emerge, it might be worth scanning fast growing stocks with high insider ownership for other under the radar names showing strong momentum and insider conviction.

Yet with the shares now trading above consensus targets after a huge 12 month run, investors must decide whether Sumitomo Metal Mining is still mispriced relative to its long term cycle, or if the market is already discounting future growth.

Price-to-Earnings of 67.3x: Is it justified?

Based on a lofty price-to-earnings ratio of 67.3x versus the last close of ¥5952, the market is clearly pricing in elevated expectations for Sumitomo Metal Mining.

The price-to-earnings multiple compares the current share price to the company’s earnings, making it a direct gauge of how much investors are willing to pay for each unit of profit in this cyclical metals and mining business.

Sumitomo Metal Mining is currently considered expensive on this metric, trading at 67.3x earnings compared to an estimated fair price-to-earnings ratio of 20.7x. This is a level the market could ultimately gravitate toward if optimism cools.

The gap is even starker when stacked against benchmarks. The stock’s 67.3x price-to-earnings multiple towers over the 12.1x average for the JP metals and mining industry and the 23.6x peer average, underscoring how aggressively the market is rewarding its earnings relative to rivals.

Explore the SWS fair ratio for Sumitomo Metal Mining

Result: Price-to-Earnings of 67.3x (OVERVALUED)

However, stretched valuation and revenue stagnation mean that any downturn in metals prices or disappointment on China stimulus could quickly derail the bullish narrative.

Find out about the key risks to this Sumitomo Metal Mining narrative.

Another View: What Our DCF Model Says

While the price-to-earnings ratio suggests overvaluation, our DCF model also indicates that Sumitomo Metal Mining is trading above its estimated fair value, which points to a limited margin of safety if the cycle turns. Could investors be paying today for profits that are still far off?

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 Metal Mining 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 907 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Sumitomo Metal Mining Narrative

If you see the story differently or want to dive into the numbers yourself, you can build a personalised view in just a few minutes: Do it your way.

A great starting point for your Sumitomo Metal Mining research is our analysis highlighting 1 key reward and 3 important warning signs that could impact your investment decision.

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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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