Enerpac Tool Group (EPAC) is drawing fresh attention after reporting higher third quarter sales and net income year on year, updating full year guidance, and completing a sizable portion of its ongoing share repurchase program.

Despite the stronger third quarter, Enerpac Tool Group's recent share price performance has been softer. The stock is at $34.75 and the year to date share price return is down 12.16%, while the 5 year total shareholder return of 38.45% points to a more constructive longer term picture.

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Enerpac Tool Group is growing sales and earnings, returning cash through buybacks, and yet the stock has slipped this year. Does that mix still tip the risk reward balance toward buyers at today’s valuation, or not?

Preferred P/E of 19x: Is it justified?

On the numbers, Enerpac Tool Group looks inexpensive relative to both its peers and its own earnings profile. The stock last closed at $34.75, and at that price it is trading on a P/E of 19x, which screens as good value against multiple benchmarks.

The P/E ratio compares what investors are paying for each dollar of current earnings, which is a straightforward way to judge how the market is pricing Enerpac Tool Group's profit stream. For this company, earnings grew by 6% over the past year and by 26.9% per year over the past 5 years, with current net profit margins of 14.7% that are slightly higher than last year and a Return on Equity of 22% that is considered high. Those figures, together with an earnings growth forecast of 10.4% per year, give useful context for assessing whether a 19x multiple is demanding or reasonable.

Against peers, the gap is clear. Management is delivering what are assessed as high quality earnings, and EPAC earnings growth over the past year of 6% exceeded the US Machinery industry at 2.4%. Yet the 19x P/E sits well below the Machinery industry average of 26.8x and also below the estimated fair P/E of 20.4x that our fair ratio work suggests the market could move toward if pricing fully reflected those fundamentals.

Result: Price-to-earnings of 19x (UNDERVALUED)

However, Enerpac Tool Group still faces risks if industrial spending weakens or if its share price decline of 12.16% year to date begins to affect investor sentiment.

Another View: Enerpac Tool Group Through a Cash Flow Lens

The earnings multiple paints Enerpac Tool Group as inexpensive, but the SWS DCF model goes further. On this view, EPAC at $34.75 is trading below an estimated future cash flow value of $48.90, which suggests the cash flow outlook supports the undervaluation story rather than challenging it. The key question is whether you place more weight on a cash flow model or on today’s sentiment driven price.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Enerpac Tool Group 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 46 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 Enerpac Tool Group looking appealing on several metrics, it makes sense to check the underlying data yourself and decide how much weight to give each factor. If you want a concise summary of what the market currently views as positives, take a look at the 4 key rewards

Looking for more investment ideas beyond Enerpac Tool Group?

If Enerpac Tool Group has sharpened your focus on quality, do not stop here. Use the Simply Wall St screener to spot other opportunities that could suit your style.

• Target stronger downside resilience by checking out 80 resilient stocks with low risk scores, which scores well on stability and lower overall risk profiles.
• Hunt for businesses that may offer more value for every dollar you invest by reviewing the 46 high quality undervalued stocks, built around quality fundamentals.
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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.