Is Tetra Tech (TTEK) Attractive After Recent Share Price Pullback And Mixed Valuation Signals

• If you are wondering whether Tetra Tech shares are offering fair value right now, this article walks through what the current price could mean for long term investors.
• The stock last closed at US$32.18, with a 7.7% decline over the past week, a 20.4% decline over the past month, and returns of 11.3% over 1 year, 17.9% over 3 years, and 28.8% over 5 years.
• Recent coverage has focused on Tetra Tech as a US listed commercial services company and on how its current share price compares with analyst expectations and sector peers. This mix of shorter term share price moves and longer term return figures has prompted fresh interest in whether the stock now looks attractively priced or still demanding.
• Our valuation model currently gives Tetra Tech a 3/6 value score, with the company screened as undervalued on 3 of 6 checks. Next, we will compare different valuation methods before finishing with a broader way of thinking about value that goes beyond the raw numbers.

Tetra Tech delivered 11.3% returns over the last year. See how this stacks up to the rest of the Commercial Services industry.

Approach 1: Tetra Tech Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model takes projected future cash flows and discounts them back into today’s dollars to estimate what the entire business could be worth now based on those projections.

For Tetra Tech, the model uses a 2 Stage Free Cash Flow to Equity approach. The latest twelve month Free Cash Flow is about $495.3 million. Analysts provide explicit Free Cash Flow estimates for the next few years, and Simply Wall St then extrapolates further, with the ten year projection reaching about $329.4 million in 2035, discounted back each year to reflect the time value of money.

Bringing all those discounted cash flows together gives an estimated intrinsic value of around $27.55 per share. Compared with the recent share price of $32.18, the DCF output suggests the stock is about 16.8% overvalued based on these assumptions and projections.

Result: OVERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Tetra Tech may be overvalued by 16.8%. Discover 48 high quality undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Tetra Tech.

Approach 2: Tetra Tech Price vs Earnings

For profitable companies, the P/E ratio is a useful way to think about value because it links what you pay per share directly to the earnings that each share generates. Investors usually accept a higher P/E when they expect stronger earnings growth or see the business as lower risk, and look for a lower P/E when growth expectations or perceived risks are higher.

Tetra Tech currently trades on a P/E of 23.84x. That sits slightly above the Commercial Services industry average P/E of 22.59x, and below the peer group average of 31.91x. Simply Wall St also calculates a proprietary “Fair Ratio” for Tetra Tech of 24.78x. This is the P/E level that might be expected given factors such as the company’s earnings growth profile, profit margins, industry, market cap and specific risks.

The Fair Ratio can be more useful than a simple comparison with peers or the industry average because it aims to adjust for differences in growth, risk, profitability and size. Comparing Tetra Tech’s current P/E of 23.84x with the Fair Ratio of 24.78x suggests the shares are slightly below that tailored benchmark, which indicates that the stock may be mildly undervalued on this measure.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Tetra Tech Narrative

Earlier we mentioned that there is an even better way to understand valuation. On Simply Wall St’s Community page you can use Narratives, where you set out your own story for Tetra Tech by linking your assumptions about future revenue, earnings, margins and fair value to the company’s context. You can then compare that fair value with the current price to decide if the stock looks attractive or expensive to you. The Narrative updates automatically as new earnings, guidance or contract news comes in, and different investors can reach very different conclusions. For example, one Narrative may use a fair value of US$48.00 based on higher margin and earnings expectations, while another may use a fair value of US$40.00 based on more cautious views about revenue concentration, non recurring disaster work and government budget shifts.

Do you think there’s more to the story for Tetra Tech? Head over to our Community to see what others are saying!

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.

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