The stock of Power REIT (AMEX:PW, 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 $37.71 per share and the market cap of $124.4 million, Power REIT stock is believed to be significantly overvalued. GF Value for Power REIT is shown in the chart below.
Because Power REIT is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 27.1% 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. Power REIT has a cash-to-debt ratio of 1.56, which ranks better than 90% of the companies in REITs industry. Based on this, GuruFocus ranks Power REIT's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Power REIT over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Power REIT has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $5.3 million and earnings of $1.194 a share. Its operating margin is 78.90%, which ranks better than 92% of the companies in REITs industry. Overall, the profitability of Power REIT is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Power REIT 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 Power REIT is 27.1%, which ranks better than 93% of the companies in REITs industry. The 3-year average EBITDA growth is 34.8%, which ranks better than 94% of the companies in REITs 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, Power REIT's return on invested capital is 12.63, and its cost of capital is 3.65. The historical ROIC vs WACC comparison of Power REIT is shown below:
In short, Power REIT (AMEX:PW, 30-year Financials) stock shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 94% of the companies in REITs industry. To learn more about Power REIT stock, you can check out its 30-year Financials here.
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