Light & Wonder Inc (LNW, Financial) recently displayed a notable daily gain of 11.21% and has experienced a 3-month gain of 17.54%. With an Earnings Per Share (EPS) of 3.96, investors are contemplating whether this stock is modestly overvalued. This article delves into a comprehensive valuation analysis to address this question and guide informed investment decisions.
Company Overview
Light & Wonder Inc is a leader in the electronic gaming machine manufacturing sector, providing equipment to various gambling establishments worldwide. Competing with giants like International Game Technology and Aristocrat Leisure, Light & Wonder has diversified its portfolio to include SciPlay, a key revenue contributor through casual mobile games, primarily in the social casino niche. The company's burgeoning iGaming business bridges its established segments, offering digital content to real-money gaming operators. This strategic positioning is crucial as we juxtapose Light & Wonder's current stock price of $86.82 against its GF Value of $74.66, hinting at potential overvaluation.
Understanding GF Value
The GF Value is an exclusive valuation metric that suggests the intrinsic value of a stock. It incorporates historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and projected business performance. The GF Value Line serves as a benchmark for fair trading value, around which the stock price is expected to oscillate.
For Light & Wonder (LNW, Financial), the GF Value suggests a modest overvaluation at its current price. The stock's future returns could be limited if it continues to trade above this calculated fair value. This assessment is pivotal for investors seeking long-term growth, as a relative overvaluation could imply a lower return compared to the company's business expansion.
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Financial Strength Analysis
Evaluating the financial strength of a company is essential before investing. Light & Wonder's financial strength is rated 4 out of 10, suggesting concerns regarding its ability to manage debt. With a cash-to-debt ratio of 0.23, it falls short compared to 66.14% of its industry peers. This indicator, alongside the interest coverage, provides insight into the company's financial robustness.
Profitability and Growth Prospects
Profitability is a critical factor for sustainable investment, and Light & Wonder has maintained profitability over the past decade. The company boasts a solid operating margin of 19%, higher than 79.17% of competitors in the Travel & Leisure industry. However, its profitability rank remains at 4 out of 10, indicating room for improvement.
Growth is equally significant for valuation. Light & Wonder's 3-year average revenue growth surpasses 55.93% of industry companies, but its EBITDA growth rate is concerning, ranking lower than 71.05% of peers. This mixed performance requires careful consideration by investors.
ROIC vs. WACC: Profitability Indicator
Comparing Return on Invested Capital (ROIC) to the Weighted Average Cost of Capital (WACC) provides another profitability perspective. Light & Wonder's ROIC of 8.72 is currently below its WACC of 10.41, suggesting the company is not generating sufficient returns compared to its capital costs.
Conclusive Insights
In conclusion, Light & Wonder (LNW, Financial) appears to be modestly overvalued based on the GF Value. With financial strength and profitability that require bolstering, and growth rates that lag behind a significant portion of the industry, investors should proceed with caution. For a more detailed financial analysis, you can explore Light & Wonder's 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.
