The stock of Welbilt (NYSE:WBT, 30-year Financials) appears to be 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 $16.25 per share and the market cap of $2.3 billion, Welbilt stock gives every indication of being significantly overvalued. GF Value for Welbilt is shown in the chart below.
Because Welbilt is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Welbilt has a cash-to-debt ratio of 0.09, which ranks in the bottom 10% of the companies in Industrial Products industry. Based on this, GuruFocus ranks Welbilt's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Welbilt over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Welbilt has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $1.2 billion and loss of $0.06 a share. Its operating margin is 7.42%, which ranks in the middle range of the companies in Industrial Products industry. Overall, the profitability of Welbilt is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Welbilt 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 Welbilt is -7.4%, which ranks worse than 81% of the companies in Industrial Products industry. The 3-year average EBITDA growth rate is -20.4%, which ranks worse than 88% of the companies in Industrial Products industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Welbilt's return on invested capital is 2.53, and its cost of capital is 11.61. The historical ROIC vs WACC comparison of Welbilt is shown below:
To conclude, Welbilt (NYSE:WBT, 30-year Financials) stock is believed to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 88% of the companies in Industrial Products industry. To learn more about Welbilt stock, you can check out its 30-year Financials here.
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