The stock of Adtran (NAS:ADTN, 30-year Financials) is believed 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 $18.27 per share and the market cap of $885.8 million, Adtran stock appears to be significantly overvalued. GF Value for Adtran is shown in the chart below.
Because Adtran 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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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. Adtran has a cash-to-debt ratio of 10000.00, which which ranks better than 100% of the companies in Hardware industry. The overall financial strength of Adtran is 8 out of 10, which indicates that the financial strength of Adtran is strong. This is the debt and cash of Adtran 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. Adtran has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $506.5 million and earnings of $0.05 a share. Its operating margin is -1.92%, which ranks worse than 73% of the companies in Hardware industry. Overall, GuruFocus ranks the profitability of Adtran at 5 out of 10, which indicates fair profitability. This is the revenue and net income of Adtran 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 Adtran is -8.5%, which ranks worse than 77% of the companies in Hardware industry. The 3-year average EBITDA growth is -44.4%, which ranks in the bottom 10% of the companies in Hardware 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, Adtran's ROIC is 1.03 while its WACC came in at 10.93. The historical ROIC vs WACC comparison of Adtran is shown below:
Overall, Adtran (NAS:ADTN, 30-year Financials) stock is estimated to be significantly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Hardware industry. To learn more about Adtran stock, you can check out its 30-year Financials here.
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