NMG Corporation Limited (ASX:NMG), a AUDA$2.71M 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 positive 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. In this article, I’ll take you through the sector growth expectations, as well as evaluate whether NMG is lagging or leading in the industry. View our latest analysis for NMG

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

Overall, the basic materials sector seems to be predominantly mature in terms of its industry life cycle. Companies appear to be vastly 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%. NMG 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 NMG may be trading cheaper than its peers.

Is NMG and the sector relatively cheap?

The metals and mining industry is trading at a PE ratio of 14x, in-line with 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 NMG’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge NMG’s value is to assume the stock should be relatively in-line with its industry.

What this means for you:

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

Are you a potential investor? If NMG has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its metals and mining peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at NMG’s future cash flows in order to assess whether the stock is trading at a reasonable price.