The stock of Algonquin Power & Utilities (NYSE:AQN, 30-year Financials) is believed to be modestly 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 $15.8563 per share and the market cap of $9.5 billion, Algonquin Power & Utilities stock gives every indication of being modestly overvalued. GF Value for Algonquin Power & Utilities is shown in the chart below.
Because Algonquin Power & Utilities is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which is estimated to grow 9.53% annually over the next three to five years.
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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. Algonquin Power & Utilities has a cash-to-debt ratio of 0.02, which is in the bottom 10% of the companies in the industry of Utilities - Independent Power Producers. GuruFocus ranks the overall financial strength of Algonquin Power & Utilities at 3 out of 10, which indicates that the financial strength of Algonquin Power & Utilities is poor. This is the debt and cash of Algonquin Power & Utilities 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. Algonquin Power & Utilities has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $1.7 billion and earnings of $1.37 a share. Its operating margin of 20.48% in the middle range of the companies in the industry of Utilities - Independent Power Producers. Overall, GuruFocus ranks Algonquin Power & Utilities's profitability as fair. This is the revenue and net income of Algonquin Power & Utilities 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. Algonquin Power & Utilities's 3-year average revenue growth rate is worse than 81% of the companies in the industry of Utilities - Independent Power Producers. Algonquin Power & Utilities's 3-year average EBITDA growth rate is 14.6%, which ranks better than 72% of the companies in the industry of Utilities - Independent Power Producers.
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, Algonquin Power & Utilities's ROIC was 2.81, while its WACC came in at 2.61. The historical ROIC vs WACC comparison of Algonquin Power & Utilities is shown below:
In conclusion, the stock of Algonquin Power & Utilities (NYSE:AQN, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 72% of the companies in the industry of Utilities - Independent Power Producers. To learn more about Algonquin Power & Utilities stock, you can check out its 30-year Financials here.
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