Down 47%, this cheap stock could be 179% undervalued and offers a 5% dividend yield

The Pebble Group (LSE:PEBB), a leading provider of digital commerce and promotional products, has seen its share price fall sharply over the past few years. In fact, it’s down 47% over 12 months.

However, beneath the surface, the company’s valuation metrics have become increasingly attractive, raising the question: could Pebble be a cheap stock that investors have simply missed?

Strong valuation metrics

Pebble’s forward valuation stands out in the small-cap universe. After a period of decline, the stock now trades on a forward price-to-earnings (P/E) ratio of just 11.5 for 2025, falling to 10 in 2026 and 8.8 in 2027. These are based on analysts’ forecasts. This is a substantial discount to both its historical averages and the wider market.

Meanwhile, Pebble’s rewarding shareholders with growing dividends. The forecast dividend yield is set to rise from 5% in 2025 to 5.4% in 2026 and 5.5% in 2027. Importantly, these dividends are well covered by earnings, with the payout ratio expected to remain below 60% throughout the forecast period. This coverage gives management flexibility to maintain or even increase dividends, even if profits fluctuate.

Net cash and adjusted valuation

One of Pebble’s most attractive features is its net cash position. The company has consistently reported net cash with £16m in 2024 rising to £18.3m by 2027, according to forecasts. This strong balance sheet reduces financial risk and enhances the company’s ability to invest or return capital to shareholders.

Adjusting for net cash, Pebble’s forward P/E ratio becomes even more attractive. Subtracting net cash from the market cap, the net cash adjusted P/E is around eight times.

Risks

No investment is without risks. Pebble operates in the promotional products sector, which can be cyclical and sensitive to changes in corporate marketing budgets. A slowdown in client spending could impact revenues and margins. While the company is investing in digital platforms, the sector’s competitive, and there’s no guarantee Pebble will maintain its edge.

On that front, I’d also highlight that expected earnings for 2024 are 25% lower than in 2024. This has been more than accounted for with the falling share price, but it highlights the company’s vulnerability to changing environments. Trump’s tariffs may also be factored into these assumptions. North America makes up around half of the global promotional products market. Uncertainty could impact US and global sales.

Investors should also consider liquidity risks, as AIM-listed shares can be more volatile and less liquid than main market peers.

One to consider?

The Pebble Group offers a rare combination of a low valuation, strong balance sheet, and growing dividends. While sector and market risks remain, the company’s forward P/E, net cash position, and dividend coverage make it an interesting option for value-focused investors willing to take a long-term view to consider.

As always, careful due diligence is essential, but Pebble’s metrics suggest it could be a hidden gem on AIM. The average share price target suggests the stock could be undervalued by 179%. It’s one I’m going to keep a close eye on.

The post Down 47%, this cheap stock could be 179% undervalued and offers a 5% dividend yield appeared first on The Motley Fool UK.

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James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.