Forestar Group Inc (FOR, Financial) recently witnessed a daily gain of 15.73%, despite a 3-month loss of -3.69%. Its Earnings Per Share (EPS) stands at 2.91. However, the question that arises is whether the stock is significantly overvalued. This article aims to provide an in-depth valuation analysis of Forestar Group. Read on to discover the true value of this stock.
A Brief Introduction to Forestar Group Inc
Forestar Group Inc is a leading residential lot development company with widespread operations across the United States. The company's core business segment is real estate, which generates all of its revenues. Forestar Group fundamentally acquires entitled real estate and develops it into finished residential lots for sale to homebuilders. Single-family residential communities account for the majority of their real estate projects. The company's strategic focus on asset turns and efficiency has led to a lower-risk business model, mainly investing in short-duration, phased development projects.
The current stock price of Forestar Group stands at $29.87, significantly higher than the GF Value of $20.56. This comparison between the stock price and the GF Value raises questions about the stock's overvaluation.
Understanding the GF Value of Forestar Group
The GF Value is a unique measure that represents the current intrinsic value of a stock. This measure is calculated based on three factors: historical multiples that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
According to this valuation method, Forestar Group appears to be significantly overvalued. The GF Value Line, which represents the fair value at which the stock should be traded, is considerably below the current stock price of $29.87 per share. This suggests that the stock may be overvalued and have poor future returns.
Given this overvaluation, the long-term return of Forestar Group's stock is likely to be much lower than its future business growth.
Financial Strength of Forestar Group
Investing in companies with poor financial strength can lead to a higher risk of permanent capital loss. Therefore, it is crucial to review a company's financial strength before deciding to buy its stock. A good starting point for understanding a company's financial strength is looking at the cash-to-debt ratio and interest coverage.
Forestar Group has a cash-to-debt ratio of 0.56, which is better than 65.67% of the companies in the Real Estate industry. GuruFocus ranks the overall financial strength of Forestar Group at 6 out of 10, indicating that the company's financial strength is fair.
Profitability and Growth of Forestar Group
Investing in profitable companies carries less risk, especially those with consistent profitability over the long term. Forestar Group has been profitable 9 years over the past 10 years. During the past 12 months, the company generated revenues of $1.30 billion and Earnings Per Share (EPS) of $2.91. Its operating margin of 14.4% is better than 53.82% of the companies in the Real Estate industry. GuruFocus ranks Forestar Group's profitability as fair.
Growth is a crucial factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders. The 3-year average annual revenue growth rate of Forestar Group is 44%, which ranks better than 92.19% of the companies in the Real Estate industry. The 3-year average EBITDA growth rate is 65.4%, which ranks better than 92.85% of the companies in the Real Estate industry.
ROIC Vs WACC Comparison
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Forestar Group's ROIC was 6.75, while its WACC came in at 7.97.
Conclusion
In summary, the stock of Forestar Group (FOR, Financial) shows every sign of being significantly overvalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks better than 92.85% of 1385 companies in the Real Estate industry. To learn more about Forestar Group stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
