Is this ASX 200 energy stock a buy at a P/E of 4.5?

It’s not too often that an ASX share, even an ASX 200 energy stock, trades on a price-to-earnings (P/E) ratio of 4.5. After all, the average P/E ratio on the ASX right now is closer to 20. 

A company that is asking an earnings multiple of 4.5 is effectively asking investors to pay $4.50 for every $1 of earnings it brings in. That’s a compelling equation for any value investor to contemplate.

So today, let’s take a look at this ASX 200 energy stock in question and see if there’s anything to like.

The stock is none other than AGL Energy Ltd (ASX: AGL). AGL is one of the oldest names on the ASX and one of the most famous energy stocks on the market. It has had a rough trot in recent years, falling from over $21 a share in early 2020 to a multi-decade low of under $4 a share in late 2021.

Today, AGL shares have recovered substantially, but are still trading at half of what they were just four years ago – asking $10.20. Check all of that out for yourself below:

Yet despite this recovery, this ASX 200 energy stock remains at an arguably cheap share price. For some ASX shares, including some energy stocks, low earnings multiples are the norm. But for others, it could indicate that a company might be trading at a bargain price. So which is it for AGL?

Is this ASX 200 energy stock a buy at 4.5 times earnings?

Well, one ASX expert thinks it’s the latter.

Rafi Lamm is the co-founder of fund manager L1 Capital. Speaking to the Australian Financial Review (AFR) this week, Lamm noted AGL’s quality and future-proof nature, noting that the company was “well positioned to benefit from strong long-term electricity demand with the lowest cost baseload generation in NSW and Victoria”.

Lamm also views the current AGL share price as cheap, noting that its “multiple of 4.5 times earnings before interest and tax” is “well below its historic multiple of six times”.

The fund manager argued that AGL is set for “a solid recovery” in terms of earnings from FY2026 onwards thanks to rising wholesale electricity futures pricing:

Strong medium term free cash flow will enable solid dividends as well as a substantial investment in the energy transition, for example, in high returning battery storage.

No doubt this opinion will delight shareholders of this ASX 200 energy stock. But let’s see if Lamm’s call proves accurate.

At the current AGL share price, this ASX 200 energy stock has a market capitalisation of $6.86 billion, with a dividend yield of 4.80%.

The post Is this ASX 200 energy stock a buy at a P/E of 4.5? appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.