The stock of Danaos (NYSE:DAC, 30-year Financials) gives every indication of being 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 $56.63 per share and the market cap of $1.2 billion, Danaos stock appears to be significantly overvalued. GF Value for Danaos is shown in the chart below.
Because Danaos 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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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Danaos has a cash-to-debt ratio of 0.05, which is worse than 89% of the companies in Transportation industry. GuruFocus ranks the overall financial strength of Danaos at 3 out of 10, which indicates that the financial strength of Danaos is poor. This is the debt and cash of Danaos over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Danaos has been profitable 6 years over the past 10 years. During the past 12 months, the company had revenues of $461.6 million and earnings of $6.45 a share. Its operating margin of 43.22% better than 97% of the companies in Transportation industry. Overall, GuruFocus ranks Danaos's profitability as fair. This is the revenue and net income of Danaos 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. Danaos's 3-year average revenue growth rate is in the bottom 10% of the companies in Transportation industry. Danaos's 3-year average EBITDA growth rate is -29.1%, which ranks in the bottom 10% of the companies in Transportation 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, Danaos's ROIC is 7.36 while its WACC came in at 6.90. The historical ROIC vs WACC comparison of Danaos is shown below:
In conclusion, The stock of Danaos (NYSE:DAC, 30-year Financials) appears to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Transportation industry. To learn more about Danaos stock, you can check out its 30-year Financials here.
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