The stock of Kirkland's (NAS:KIRK, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $28.02 per share and the market cap of $400.6 million, Kirkland's stock is estimated to be significantly overvalued. GF Value for Kirkland's is shown in the chart below.
Because Kirkland's is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Kirkland's has a cash-to-debt ratio of 0.52, which ranks in the middle range of the companies in the industry of Retail - Cyclical. Based on this, GuruFocus ranks Kirkland's's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Kirkland's over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Kirkland's has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $543.5 million and earnings of $0.99 a share. Its operating margin of 3.25% in the middle range of the companies in the industry of Retail - Cyclical. Overall, GuruFocus ranks Kirkland's's profitability as fair. This is the revenue and net income of Kirkland's over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Kirkland's is -2.3%, which ranks in the middle range of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth is -2.4%, which ranks in the middle range of the companies in the industry of Retail - Cyclical.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Kirkland's's return on invested capital is 11.81, and its cost of capital is 9.61. The historical ROIC vs WACC comparison of Kirkland's is shown below:
In short, Kirkland's (NAS:KIRK, 30-year Financials) stock is believed to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Retail - Cyclical. To learn more about Kirkland's stock, you can check out its 30-year Financials here.
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