The stock of Tokyo Electron (OTCPK:TOELF, 30-year Financials) shows every sign of being 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 $435.74 per share and the market cap of $67.6 billion, Tokyo Electron stock is believed to be significantly overvalued. GF Value for Tokyo Electron is shown in the chart below.
Because Tokyo Electron is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 13.4% over the past three years and is estimated to grow 1.98% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Tokyo Electron has a cash-to-debt ratio of 10000.00, which which ranks better than 100% of the companies in Semiconductors industry. The overall financial strength of Tokyo Electron is 10 out of 10, which indicates that the financial strength of Tokyo Electron is strong. This is the debt and cash of Tokyo Electron 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. Tokyo Electron has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $12.1 billion and earnings of $12.941 a share. Its operating margin is 21.85%, which ranks better than 86% of the companies in Semiconductors industry. Overall, the profitability of Tokyo Electron is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Tokyo Electron 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Tokyo Electron is 13.4%, which ranks better than 76% of the companies in Semiconductors industry. The 3-year average EBITDA growth rate is 16.5%, which ranks in the middle range of the companies in Semiconductors industry.
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, Tokyo Electron's ROIC was 26.26, while its WACC came in at 6.33. The historical ROIC vs WACC comparison of Tokyo Electron is shown below:
In summary, The stock of Tokyo Electron (OTCPK:TOELF, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks in the middle range of the companies in Semiconductors industry. To learn more about Tokyo Electron stock, you can check out its 30-year Financials here.
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