The stock of Textainer Group Holdings (NYSE:TGH, 30-year Financials) is estimated 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 $28.96 per share and the market cap of $1.5 billion, Textainer Group Holdings stock shows every sign of being significantly overvalued. GF Value for Textainer Group Holdings is shown in the chart below.
Because Textainer Group Holdings is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 6.7% over the past five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Textainer Group Holdings has a cash-to-debt ratio of 0.03, which is in the bottom 10% of the companies in Business Services industry. The overall financial strength of Textainer Group Holdings is 3 out of 10, which indicates that the financial strength of Textainer Group Holdings is poor. This is the debt and cash of Textainer Group Holdings over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Textainer Group Holdings has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $638.1 million and earnings of $1.41 a share. Its operating margin is 30.20%, which ranks better than 95% of the companies in Business Services industry. Overall, GuruFocus ranks the profitability of Textainer Group Holdings at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Textainer Group Holdings 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 Textainer Group Holdings is 6.7%, which ranks in the middle range of the companies in Business Services industry. The 3-year average EBITDA growth rate is 9.1%, which ranks in the middle range of the companies in Business Services industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Textainer Group Holdings's ROIC is 3.73 while its WACC came in at 4.63. The historical ROIC vs WACC comparison of Textainer Group Holdings is shown below:
To conclude, the stock of Textainer Group Holdings (NYSE:TGH, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Business Services industry. To learn more about Textainer Group Holdings stock, you can check out its 30-year Financials here.
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