The stock of Sandfire Resources (ASX:SFR, 30-year Financials) shows every sign of being modestly undervalued, 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 AUD 6.64 per share and the market cap of AUD 1.2 billion, Sandfire Resources stock is estimated to be modestly undervalued. GF Value for Sandfire Resources is shown in the chart below.
Because Sandfire Resources is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 3.4% over the past five years.
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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. Sandfire Resources has a cash-to-debt ratio of 20.47, which ranks in the middle range of the companies in Metals & Mining industry. Based on this, GuruFocus ranks Sandfire Resources's financial strength as 8 out of 10, suggesting strong balance sheet. This is the debt and cash of Sandfire Resources 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. Sandfire Resources has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of AUD 662.6 million and earnings of AUD 0.562 a share. Its operating margin of 25.13% better than 81% of the companies in Metals & Mining industry. Overall, GuruFocus ranks Sandfire Resources's profitability as fair. This is the revenue and net income of Sandfire Resources over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Sandfire Resources's 3-year average revenue growth rate is in the middle range of the companies in Metals & Mining industry. Sandfire Resources's 3-year average EBITDA growth rate is 7.5%, which ranks in the middle range of the companies in Metals & Mining industry.
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, Sandfire Resources's return on invested capital is 18.23, and its cost of capital is 9.75. The historical ROIC vs WACC comparison of Sandfire Resources is shown below:
In closing, the stock of Sandfire Resources (ASX:SFR, 30-year Financials) is estimated to be modestly undervalued. The company's financial condition is strong and its profitability is fair. Its growth ranks in the middle range of the companies in Metals & Mining industry. To learn more about Sandfire Resources stock, you can check out its 30-year Financials here.
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