The stock of Summit Hotel Properties (NYSE:INN, 30-year Financials) appears 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 $10.16 per share and the market cap of $1.1 billion, Summit Hotel Properties stock appears to be significantly overvalued. GF Value for Summit Hotel Properties is shown in the chart below.
Because Summit Hotel Properties 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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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Summit Hotel Properties has a cash-to-debt ratio of 0.02, which is worse than 78% of the companies in REITs industry. GuruFocus ranks the overall financial strength of Summit Hotel Properties at 2 out of 10, which indicates that the financial strength of Summit Hotel Properties is poor. This is the debt and cash of Summit Hotel Properties 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. Summit Hotel Properties has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $183.9 million and loss of $1.68 a share. Its operating margin is -69.78%, which ranks in the bottom 10% of the companies in REITs industry. Overall, the profitability of Summit Hotel Properties is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Summit Hotel Properties over the past years:
Growth is probably the most important factor 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. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Summit Hotel Properties is -24.2%, which ranks in the bottom 10% of the companies in REITs industry. The 3-year average EBITDA growth rate is -71.9%, which ranks in the bottom 10% of the companies in REITs 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, Summit Hotel Properties's return on invested capital is -5.64, and its cost of capital is 10.44. The historical ROIC vs WACC comparison of Summit Hotel Properties is shown below:
Overall, The stock of Summit Hotel Properties (NYSE:INN, 30-year Financials) is estimated to be 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 REITs industry. To learn more about Summit Hotel Properties stock, you can check out its 30-year Financials here.
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