SMS (TSE:2175) has caught investor attention after recent share price moves, with the stock last closing at ¥2,518. The company operates information infrastructure services across nursing care, medical, career, healthcare and elderly care markets.
Recent trading has been strong, with SMS posting a 9.81% 1 month share price return and a 25.77% 3 month share price return, on top of an 86.52% year to date share price return. However, the 5 year total shareholder return is down 39.57%.
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After such a sharp rebound, but with a weaker 5-year record and a current loss-making position, is most of SMS's re-rating already reflected in the ¥2,518 share price, or does the valuation still leave meaningful upside on the table?
With SMS last closing at ¥2,518, our DCF model suggests the stock is trading at a discount to an estimated future cash flow value of ¥3,315.99, while the current market is also assigning a P/S ratio of 3.1x that looks rich against peers. That mix of a discounted DCF value and a relatively high sales multiple gives investors two very different reference points to weigh.
The P/S multiple compares SMS's market value to its revenue and is often used for companies that are not currently profitable. For SMS, which reported annual revenue of ¥66,275 and a net loss of ¥14,529, a sales based yardstick is especially relevant because earnings do not yet provide a clean signal.
On this measure, SMS is described as expensive at 3.1x P/S compared to both the Professional Services peer average of 2.5x and the broader JP Professional Services industry average of 0.9x. However, a separate fair value framework, the SWS fair ratio, indicates that a P/S of 4.4x could be justified for SMS. This implies that the current multiple is below that fair ratio level even if it is higher than peers.
Relative to the industry, the gap is clear. SMS trades at more than 3x the JP Professional Services industry average P/S, which points to investors attaching a premium that peers do not enjoy, while still sitting below the 4.4x level suggested by the fair ratio model.
Explore the SWS fair ratio for SMS.
Result: Price-to-Sales of 3.1x (UNDERVALUED)
However, SMS still faces clear risks, including its current net loss position and any setback to revenue growth, which could quickly challenge the recent re rating story.
Find out about the key risks to this SMS narrative.
The earlier P/S discussion painted SMS as expensive versus peers but cheaper than its fair ratio. The SWS DCF model points in a different direction. It indicates SMS at ¥2,518 is trading below an estimated future cash flow value of ¥3,315.99, which frames the stock as undervalued instead. For investors, that split raises a simple question: Which signal deserves more weight, the market's peer-based pricing or the DCF cash flow view?
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 SMS 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 25 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.
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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.
Companies discussed in this article include 2175.T.
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