The stock of UGI (NYSE:UGI, 30-year Financials) appears 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 $44.02 per share and the market cap of $9.2 billion, UGI stock is believed to be modestly overvalued. GF Value for UGI is shown in the chart below.
Because UGI is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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. UGI has a cash-to-debt ratio of 0.06, which is worse than 79% of the companies in the industry of Utilities - Regulated. The overall financial strength of UGI is 4 out of 10, which indicates that the financial strength of UGI is poor. This is the debt and cash of UGI 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. UGI has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $6.5 billion and earnings of $2.97 a share. Its operating margin of 17.65% in the middle range of the companies in the industry of Utilities - Regulated. Overall, GuruFocus ranks UGI's profitability as fair. This is the revenue and net income of UGI 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of UGI is -3.3%, which ranks worse than 79% of the companies in the industry of Utilities - Regulated. The 3-year average EBITDA growth rate is -2.5%, which ranks worse than 72% of the companies in the industry of Utilities - Regulated.
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, UGI's return on invested capital is 6.53, and its cost of capital is 6.27. The historical ROIC vs WACC comparison of UGI is shown below:
To conclude, the stock of UGI (NYSE:UGI, 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 72% of the companies in the industry of Utilities - Regulated. To learn more about UGI stock, you can check out its 30-year Financials here.
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