The stock of Entergy (NYSE:ETR, 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 $103.41 per share and the market cap of $20.8 billion, Entergy stock gives every indication of being modestly overvalued. GF Value for Entergy is shown in the chart below.
Because Entergy is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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. Entergy has a cash-to-debt ratio of 0.07, which which ranks worse than 77% of the companies in the industry of Utilities - Regulated. The overall financial strength of Entergy is 3 out of 10, which indicates that the financial strength of Entergy is poor. This is the debt and cash of Entergy 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. Entergy has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $10.1 billion and earnings of $6.9 a share. Its operating margin is 17.76%, which ranks in the middle range of the companies in the industry of Utilities - Regulated. Overall, the profitability of Entergy is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Entergy over the past years:
Growth is probably the most important factor 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. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Entergy is -6.4%, which ranks worse than 86% of the companies in the industry of Utilities - Regulated. The 3-year average EBITDA growth rate is 1.6%, which ranks in the middle range of the companies in the industry of Utilities - Regulated.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Entergy's ROIC was 3.62, while its WACC came in at 4.50. The historical ROIC vs WACC comparison of Entergy is shown below:
Overall, The stock of Entergy (NYSE:ETR, 30-year Financials) appears to be modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Utilities - Regulated. To learn more about Entergy stock, you can check out its 30-year Financials here.
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