Investors looking for a disciplined, long-term method for choosing stocks frequently consider the ideas of famous fund manager Peter Lynch. His plan, detailed in One Up on Wall Street, centers on finding firms with lasting growth, good financial condition, and fair prices, a thinking often called Growth at a Reasonable Price (GARP). It highlights basic strength instead of predicting market movements, supporting investment in easy-to-understand companies that can be owned for a long time. A filter using Lynch's main rules recently highlighted a particular industrial firm: Perma-Pipe International Holdings (NASDAQ:PPIH).
Fit with Lynch's Growth and Price Measures
Central to the Lynch approach is looking for companies increasing their earnings at a good, maintainable pace, while also being valued at a price that is not too high for that growth. Perma-Pipe International seems to meet these requirements directly.
- Maintainable Earnings Growth: Lynch preferred companies with a 5-year earnings per share (EPS) growth rate from 15% to 30%, a pace that is interesting but not unstable. Perma-Pipe's EPS has increased at an average yearly rate of 21.7% over the last five years, putting it clearly inside this desired zone. This points to a record of controlled, steady growth.
- The Important PEG Ratio: Maybe the most well-known Lynch measure is the Price/Earnings to Growth (PEG) ratio, which tries to find value compared to growth. A PEG ratio of 1 or less is seen as good. Perma-Pipe's PEG ratio, using its past five-year growth, is about 0.86. This shows that, when its historical growth rate is considered, the stock's current price-to-earnings multiple could be a fair valuation.
An Emphasis on Financial Condition and Earnings
Lynch highlighted the need for a solid balance sheet and effective management. He thought that companies in good financial shape were more ready to handle difficult periods and build value over many years. Perma-Pipe's main condition and earnings measures match this careful thinking.
- Cautious Financial Setup: Lynch was cautious about high debt, usually wanting a Debt-to-Equity ratio under 0.25. Perma-Pipe's ratio of 0.15 shows a financial structure supported mainly by equity, which reduces interest costs and money-related danger.
- Sufficient Near-Term Funds: The company's Current Ratio of 1.76 indicates it has more than sufficient short-term assets to pay its short-term debts. This satisfies Lynch's basic filter for financial soundness and suggests the company is unlikely to have immediate payment problems.
- Good Return on Equity (ROE): ROE calculates how well a company produces profits from shareholder investment. Lynch wanted solid earnings, often seeking an ROE above 15%. Perma-Pipe's ROE of 16.2% shows a capacity to provide good returns on the money put into the business.
Basic Profile Summary
A wider view of Perma-Pipe's basic analysis report on Chartmill supports the image shown by the Lynch filter. The company gets an overall basic score of 6 out of 10, pointing to a varied but somewhat positive profile compared to others in the Machinery field.
- Earnings is a definite positive, with a score of 7/10. The company displays very good returns on invested capital (15.1%) and growing operating margins.
- Financial Condition is scored 6/10. The extremely low debt level is a major plus, although the current ratio is seen as somewhat low next to some industry competitors.
- Valuation gets 6/10. While the standard P/E ratio seems high, the analysis states that measures like Enterprise Value/EBITDA and the PEG ratio indicate a more fair valuation inside the industry setting.
- Growth receives a 6/10. Even with a decrease in EPS last year, the long-term growth pattern is good, and forecasters expect a return to solid earnings and sales growth in the coming years.
For a complete look at these measures, you can see the full basic analysis report for PPIH.
The Lynch Case for Perma-Pipe
Perma-Pipe International works in the necessary, though ordinary, industry of making specialty piping and leak detection systems for energy distribution and chemical moving. This matches Lynch's liking for "boring" companies in clear industries. The filter findings indicate it is not a high-risk proposition, but a company that has in the past grown earnings at a maintainable rate, keeps a very strong balance sheet with little debt, and is now valued in a way that considers its growth history. For an investor using a GARP view through Peter Lynch's ideas, PPIH stands as an option that has met a set of number-based filters made to find quality long-term growers.
Want to look at other companies that meet similar strict basic checks? You can use the Peter Lynch filter yourself and view the most recent findings here.
Disclaimer: This article is for information only and is not financial guidance, a suggestion, or a bid to buy or sell any securities. The study uses data and a particular investment strategy filter, it is not a replacement for your own investigation and careful review. Investing has risks, including the possible loss of the original amount invested.
