The stock of Williams (NYSE:WMB, 30-year Financials) is estimated to be 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 $23.77 per share and the market cap of $28.9 billion, Williams stock gives every indication of being modestly overvalued. GF Value for Williams is shown in the chart below.
Because Williams is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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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. Williams has a cash-to-debt ratio of 0.01, which is in the bottom 10% of the companies in Oil & Gas industry. The overall financial strength of Williams is 3 out of 10, which indicates that the financial strength of Williams is poor. This is the debt and cash of Williams 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. Williams has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $7.7 billion and earnings of $0.16 a share. Its operating margin is 33.31%, which ranks better than 90% of the companies in Oil & Gas industry. Overall, the profitability of Williams is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Williams over the past years:
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. Williams's 3-year average revenue growth rate is worse than 72% of the companies in Oil & Gas industry. Williams's 3-year average EBITDA growth rate is -13.6%, which ranks worse than 69% of the companies in Oil & Gas 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, Williams's ROIC is 4.15 while its WACC came in at 7.82. The historical ROIC vs WACC comparison of Williams is shown below:
In short, The stock of Williams (NYSE:WMB, 30-year Financials) is believed to be modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 69% of the companies in Oil & Gas industry. To learn more about Williams stock, you can check out its 30-year Financials here.
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