Ferrum Crescent Limited (ASX:FCR), a AUDA$3.05M small-cap, operates in the basic materials industry which supplies materials for construction. This means it is highly sensitive to changes in the economic cycle, a key driver of building activities. Basic material analysts are forecasting for the entire industry, a strong double-digit growth of 25.15% in the upcoming year , and a massive growth of 41.20% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. Below, I will examine the sector growth prospects, as well as evaluate whether FCR is lagging or leading in the industry. Check out our latest analysis for Ferrum Crescent

What’s the catalyst for FCR’s sector growth?

Altogether the basic materials sector seems to be predominantly mature in terms of its industry life cycle. Companies appear to be highly competitive and consolidation seems to be a inevitable. There are plenty of emerging trends to deal with across the board including the reduction of waste, raw material inflation, and innovation in global supply chain management. In the past year, the industry delivered growth of 6.76%, beating the Australian market growth of 5.37%. FCR lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means FCR may be trading cheaper than its peers.

Is FCR and the sector relatively cheap?

The metals and mining sector’s PE is currently hovering around 14x, relatively similar to the rest of the Australian stock market PE of 17x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. Furthermore, the industry returned a similar 11.83% on equities compared to the market’s 11.92%. Since FCR’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge FCR’s value is to assume the stock should be relatively in-line with its industry.

What this means for you:

Are you a shareholder? FCR has been a metals and mining industry laggard in the past year. If your initial investment thesis is around the growth prospects of FCR, there are other metals and mining companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how FCR fits into your wider portfolio and the opportunity cost of holding onto the stock.