Is it worth investors now considering National Grid, with its share price down 5% from April?
National Gridâs (LSE: NG) share price has dipped 5% from its 23 April one-year traded high of £11.03.
That said, a drop in price does not mean a stock is undervalued any more than a rise means it is overvalued. This is because price and value are not the same thing.
Price is whatever the market will pay for an asset at any given time, while value reflects the businessâs fundamentals.
It is in identifying and quantifying the difference between the two that major long-term profits are made, in my experience.
To ascertain whether such a gap exists in National Grid shares, I re-examined the business and ran the key numbers.
The businessâs fundamentals
The firm retains the monopoly for electricity transmission in England and gas transmission across the UK. It also does the same in the northeastern US, with a focus on New York and Massachusetts.Â
Given the importance of its role in the UKâs core infrastructure, it is heavily regulated by Ofgem. This also brings with it heavy government-mandated investment obligations, despite being a public company.
Indeed, its full-year 2024/25 showed capital investment in infrastructure of almost £10bn. And this is part of its plans to invest around £60bn in the same over five years.
This huge investment commitment remains a key risk to the firmâs earnings, in my view.
That said, the 2024/25 results showed its profit before tax rose 20% to £3.65bn. Earnings per share rose 8% to 60p.
Over the five years to fiscal year 2028/29, the utility estimates a compound annual growth rate (CAGR) in assets of about 10%. It projects that this will drive a CAGR in underlying earnings per share of 6%-8%.
Analysts forecast that its earnings will increase by 11% each year to the end of the fiscal year 2028/29.
The share price valuation
The first part of my price assessment compares National Gridâs key valuations with its principal peers — Engie, E.ON, Enel, and Iberdrola.
This starts well from an investorâs perspective, with the firmâs 1.4 price-to-book ratio looking very undervalued against its peersâ average of 2.1. It is bottom of the group on this rating too.
However, on the key price-to-sales ratio, National Grid sits top of the group at 2.8 against an average of 1.1
It also looks very overvalued on its 18.3 price-to-earnings ratio compared to its competitorsâ average of 14.6.
Therefore, it looks like National Gridâs only undervaluation reflects simply the huge infrastructure assets it has spent money on. These are accounted for in its book value. On the more performance-related measures, it fares much less well.
To cut to the chase on this, I ran a discounted cash flow valuation. This pinpoints where any firmâs share price should be, based on future cash flow forecasts for the underlying business.
It shows National Grid shares are marginally â 6% — undervalued at their current £10.50 price. So, their fair value is £11.17.
My investment view
I would never buy a growth stock that is not at least 20% undervalued because market volatility could wipe out lesser potential gains.
So, I do not believe it is worth investorsâ consideration at its current price, with no further performance data to factor in.
The post Is it worth investors now considering National Grid, with its share price down 5% from April? appeared first on The Motley Fool UK.
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Simon Watkins has no position in any of the shares mentioned. The Motley Fool UK has recommended National Grid Plc. 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.
