The stock of PG&E (NYSE:PCG, 30-year Financials) gives every indication of being 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 $11.84 per share and the market cap of $26.6 billion, PG&E stock is believed to be significantly overvalued. GF Value for PG&E is shown in the chart below.
Because PG&E is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 5.83% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. PG&E has a cash-to-debt ratio of 0.01, which which ranks in the bottom 10% of the companies in the industry of Utilities - Regulated. The overall financial strength of PG&E is 3 out of 10, which indicates that the financial strength of PG&E is poor. This is the debt and cash of PG&E 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. PG&E has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $18.5 billion and loss of $3.019 a share. Its operating margin of 9.94% in the middle range of the companies in the industry of Utilities - Regulated. Overall, GuruFocus ranks PG&E's profitability as fair. This is the revenue and net income of PG&E 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 PG&E is -23.9%, which ranks in the bottom 10% of the companies in the industry of Utilities - Regulated. The 3-year average EBITDA growth is -36.1%, which ranks in the bottom 10% of the companies in the industry of Utilities - Regulated.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, PG&E's return on invested capital is 2.69, and its cost of capital is 8.64. The historical ROIC vs WACC comparison of PG&E is shown below:
In closing, the stock of PG&E (NYSE:PCG, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in the industry of Utilities - Regulated. To learn more about PG&E stock, you can check out its 30-year Financials here.
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