The stock of Franklin Wireless (NAS:FKWL, 30-year Financials) gives every indication of being possible value trap, 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 $8.92 per share and the market cap of $103.4 million, Franklin Wireless stock appears to be possible value trap. GF Value for Franklin Wireless is shown in the chart below.
The reason we think that Franklin Wireless stock might be a value trap is because
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Franklin Wireless has a cash-to-debt ratio of 67.20, which is better than 88% of the companies in Hardware industry. The overall financial strength of Franklin Wireless is 7 out of 10, which indicates that the financial strength of Franklin Wireless is fair. This is the debt and cash of Franklin Wireless 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. Franklin Wireless has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $210.5 million and earnings of $1.901 a share. Its operating margin is 13.32%, which ranks better than 83% of the companies in Hardware industry. Overall, the profitability of Franklin Wireless is ranked 4 out of 10, which indicates poor profitability. This is the revenue and net income of Franklin Wireless 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 Franklin Wireless is 15.4%, which ranks better than 86% of the companies in Hardware industry. The 3-year average EBITDA growth rate is 65.2%, which ranks better than 95% of the companies in Hardware 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, Franklin Wireless’s return on invested capital is 480.39, and its cost of capital is 0.94. The historical ROIC vs WACC comparison of Franklin Wireless is shown below:
In closing, the stock of Franklin Wireless (NAS:FKWL, 30-year Financials) is believed to be possible value trap. The company's financial condition is fair and its profitability is poor. Its growth ranks better than 95% of the companies in Hardware industry. To learn more about Franklin Wireless stock, you can check out its 30-year Financials here.
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