Floor & Decor Holdings Stock Gives Every Indication Of Being Significantly Overvalued

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Apr 04, 2021
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The stock of Floor & Decor Holdings (NYSE:FND, 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 $98.89 per share and the market cap of $10.3 billion, Floor & Decor Holdings stock gives every indication of being significantly overvalued. GF Value for Floor & Decor Holdings is shown in the chart below.

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Because Floor & Decor Holdings is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 18% over the past three years and is estimated to grow 20.55% annually over the next three to 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. Floor & Decor Holdings has a cash-to-debt ratio of 0.25, which is worse than 70% of the companies in the industry of Retail - Cyclical. The overall financial strength of Floor & Decor Holdings is 5 out of 10, which indicates that the financial strength of Floor & Decor Holdings is fair. This is the debt and cash of Floor & Decor Holdings over the past years:

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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. Floor & Decor Holdings has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.4 billion and earnings of $1.84 a share. Its operating margin is 8.85%, which ranks better than 80% of the companies in the industry of Retail - Cyclical. Overall, the profitability of Floor & Decor Holdings is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Floor & Decor Holdings over the past years:

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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. Floor & Decor Holdings's 3-year average revenue growth rate is better than 89% of the companies in the industry of Retail - Cyclical. Floor & Decor Holdings's 3-year average EBITDA growth rate is 24.3%, which ranks better than 76% of the companies in the industry of Retail - Cyclical.

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, Floor & Decor Holdings's ROIC was 10.39, while its WACC came in at 12.36. The historical ROIC vs WACC comparison of Floor & Decor Holdings is shown below:

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In closing, The stock of Floor & Decor Holdings (NYSE:FND, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 76% of the companies in the industry of Retail - Cyclical. To learn more about Floor & Decor Holdings stock, you can check out its 30-year Financials here.

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