The stock of FreightCar America (NAS:RAIL, 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 $5.3 per share and the market cap of $82.6 million, FreightCar America stock is believed to be significantly overvalued. GF Value for FreightCar America is shown in the chart below.
Because FreightCar America 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. FreightCar America has a cash-to-debt ratio of 0.63, which ranks better than 67% of the companies in Transportation industry. Based on this, GuruFocus ranks FreightCar America's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of FreightCar America 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. FreightCar America has been profitable 5 years over the past 10 years. During the past 12 months, the company had revenues of $108.4 million and loss of $6.16 a share. Its operating margin of -39.94% in the bottom 10% of the companies in Transportation industry. Overall, GuruFocus ranks FreightCar America's profitability as poor. This is the revenue and net income of FreightCar America 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. FreightCar America's 3-year average revenue growth rate is in the bottom 10% of the companies in Transportation industry. FreightCar America's 3-year average EBITDA growth rate is -46%, which ranks in the bottom 10% of the companies in Transportation industry.
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, FreightCar America's return on invested capital is -26.48, and its cost of capital is 10.20. The historical ROIC vs WACC comparison of FreightCar America is shown below:
To conclude, FreightCar America (NAS:RAIL, 30-year Financials) stock is believed to be significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Transportation industry. To learn more about FreightCar America stock, you can check out its 30-year Financials here.
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