The stock of GCP Applied Technologies (NYSE:GCP, 30-year Financials) shows every sign of being 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 $24.71 per share and the market cap of $1.8 billion, GCP Applied Technologies stock appears to be modestly overvalued. GF Value for GCP Applied Technologies is shown in the chart below.
Because GCP Applied Technologies is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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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. GCP Applied Technologies has a cash-to-debt ratio of 1.25, which which ranks in the middle range of the companies in Chemicals industry. The overall financial strength of GCP Applied Technologies is 6 out of 10, which indicates that the financial strength of GCP Applied Technologies is fair. This is the debt and cash of GCP Applied Technologies 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. GCP Applied Technologies has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $903.2 million and earnings of $1.35 a share. Its operating margin is 8.36%, which ranks in the middle range of the companies in Chemicals industry. Overall, the profitability of GCP Applied Technologies is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of GCP Applied Technologies over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of GCP Applied Technologies is -6.6%, which ranks worse than 84% of the companies in Chemicals industry. The 3-year average EBITDA growth is 36.7%, which ranks better than 90% of the companies in Chemicals industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, GCP Applied Technologies's return on invested capital is 7.24, and its cost of capital is 6.56. The historical ROIC vs WACC comparison of GCP Applied Technologies is shown below:
In conclusion, the stock of GCP Applied Technologies (NYSE:GCP, 30-year Financials) appears to be modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 90% of the companies in Chemicals industry. To learn more about GCP Applied Technologies stock, you can check out its 30-year Financials here.
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