The stock of Iridium Communications (NAS:IRDM, 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 $40.46 per share and the market cap of $5.4 billion, Iridium Communications stock is believed to be significantly overvalued. GF Value for Iridium Communications is shown in the chart below.
Because Iridium Communications is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7.7% over the past five years.
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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. Iridium Communications has a cash-to-debt ratio of 0.15, which which ranks worse than 70% of the companies in Telecommunication Services industry. The overall financial strength of Iridium Communications is 4 out of 10, which indicates that the financial strength of Iridium Communications is poor. This is the debt and cash of Iridium Communications 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. Iridium Communications has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $583.4 million and loss of $0.42 a share. Its operating margin of 6.08% in the middle range of the companies in Telecommunication Services industry. Overall, GuruFocus ranks Iridium Communications's profitability as fair. This is the revenue and net income of Iridium Communications 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. Iridium Communications's 3-year average revenue growth rate is better than 75% of the companies in Telecommunication Services industry. Iridium Communications's 3-year average EBITDA growth rate is 7.6%, which ranks in the middle range of the companies in Telecommunication Services industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Iridium Communications's return on invested capital is 0.70, and its cost of capital is 7.68. The historical ROIC vs WACC comparison of Iridium Communications is shown below:
In summary, the stock of Iridium Communications (NAS:IRDM, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Telecommunication Services industry. To learn more about Iridium Communications stock, you can check out its 30-year Financials here.
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