UBS’ decision to downgrade Perimeter Solutions (PRM) from Buy to Neutral, while the company funds its Medical Manufacturing Technologies acquisition through a $550 million note offering, has put the stock’s risk and return trade off in sharper focus.

At a share price of $28.08, Perimeter Solutions has seen a 24.58% 3 month share price return and a 116.33% 1 year total shareholder return. This suggests recent momentum remains positive even as the UBS downgrade and funding for the Medical Manufacturing Technologies deal reshape how investors assess risk and future potential.

If UBS’ change of stance has you reassessing your watchlist, it could be a good moment to broaden your search and check out fast growing stocks with high insider ownership.

With UBS lowering its rating, but analysts’ average price targets still sitting above the current US$28.08 share price, the key question is whether PRM is now undervalued or if the market is already pricing in future growth.

Price to Earnings of 53.2x: Is it justified?

Perimeter Solutions last closed at US$28.08, yet its P/E multiple of 53.2x sits well above both the US Chemicals industry and its closest peers.

The P/E ratio compares the current share price to earnings per share, so a higher multiple usually reflects higher expectations for future profitability or a perceived quality premium.

In PRM’s case, the company only recently moved into profitability and has high quality earnings, so the market may be putting a premium on that earnings profile while also factoring in revenue that is forecast to grow faster than the broader US market.

Even with those positives, a 53.2x P/E is more than double the US Chemicals industry average of 25.1x and stands well above the peer average of 30.7x. This points to investors paying a much richer price for each dollar of PRM’s earnings than they do for comparable names.

Result: Price to Earnings of 53.2x (OVERVALUED)

However, the $550 million note offering and UBS downgrade highlight financing and execution risks around acquisitions that could quickly challenge today’s premium P/E story.

Another View: DCF Suggests a Tighter Margin of Safety

While the 53.2x P/E points to an expensive stock, our DCF model paints a more restrained picture. At US$28.08, Perimeter Solutions is trading about 4.4% below an estimated fair value of US$29.36. This looks more like a narrow discount than a deep bargain. So how much cushion do you really have if expectations slip?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Perimeter Solutions 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 884 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 Perimeter Solutions Narrative

If you look at the numbers and come to a different conclusion, or simply prefer to build your own view from scratch, you can create a full narrative yourself in just a few minutes with Do it your way.

A good starting point is our analysis highlighting 3 key rewards investors are optimistic about regarding Perimeter Solutions.

Looking for more investment ideas?

If PRM is only one piece of your watchlist, now is the time to widen your scope and let structured stock ideas do some of the heavy lifting for you.

• Spot potential value with these 884 undervalued stocks based on cash flows that focus on companies where market prices differ from cash flow based assessments.
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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.