The concept of 'cheap' ASX shares can be misinterpreted. Whether a company's shares are 5 cents or $5 is almost irrelevant. What matters is whether the company presents value. In other words, could it provide an attractive return?
Growth and market capitalisation are functions of value. If I can buy a laundromat for $10,000 and it produces $2,000 per annum with no expectation of future growth, that equates to a price-to-earnings (P/E) ratio of 5 — not a bad proposition.
However, another laundromat selling for $15,000, generating $2,500 in the past year — a P/E of 6 — expects to grow 10% per annum over the next five years. While slightly more 'expensive', this laundromat presents greater value based on future earnings.
I look at ASX shares the same way. Here are three companies I believe could be cheap buys right now.
Where I'm finding deals among ASX shares
Trawling through hundreds of publicly listed Australian companies, a few have pinged my value-finding radar. These are businesses that I believe are currently experiencing an underestimation of their growth potential.
Nick Scali Limited (ASX: NCK)
At 10.2 times earnings, the designer furniture retailer trades at a discount to the wider Australian specialty retail industry. Part of the reduced multiple could be attributable to forecasts of revenue and earnings decline as interest rates bite.
Helmed by Anthony Scali, son of the founder, this company has an impressive track record of growth. Total revenue has grown at a compound annual growth rate (CAGR) of 15.2%, accompanied by increasing net margins.
Looking forward, the sofa seller is targeting a further 64% to 74% increase in store count over time. So, while the near term might present some softness, I believe it could be an opportunity to buy shares on the cheap ahead of solid growth on a longer timescale.
Lindsay Australia Ltd (ASX: LAU)
Possibly the most attractive ASX share on my list, Lindsay Australia is an integrated transport company that trades far below its peers. Despite growing its top line by a CAGR of 13.4% over the last five years, the $333 million business is valued at 9.4 times FY2023 earnings.
What's more perplexing is this meagre multiple prevails even though analysts forecast growth. In FY23, Lindsay trucked in $34.5 million of net profits after tax (NPAT). This figure is expected to increase to $50.1 million in FY26, equating to a 13.2% CAGR in earnings over the next three years.
Layering in the company's sturdy balance sheet and quality management, it seems to me this ASX share could be a cheap deal.
Accent Group Ltd (ASX: AX1)
This sneaker seller looks to be out of fashion in the market. Distributing footwear and apparel, Accent Group is a leader within its industry in Australia and New Zealand. Yet, the P/E ratio for this company has been compressed to 13.4 times, down from 33.1 in December 2021.
The current multiple is more or less in line without peers. However, I tend to think Accent is a cut above the rest. Namely, its exceptional ability to expand into new distributed brands and grow store count. In four years, the company grew its stores to 821 from 429 (71%).
In my opinion, the current earnings multiple does not fully reflect Accent's room for further growth. The company has executed attractive acquisitions in the past. The tightening in consumer spending could favour Accent as weaker peers look to consolidate.
This ASX share is sitting atop my own buy list.
