The stock of Keyence (OTCPK:KYCCF, 30-year Financials) appears 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 $464 per share and the market cap of $112.9 billion, Keyence stock appears to be significantly overvalued. GF Value for Keyence is shown in the chart below.
Because Keyence is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 18.2% over the past three years and is estimated to grow 4.51% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Keyence has a cash-to-debt ratio of 10000.00, which ranks better than 100% of the companies in Hardware industry. Based on this, GuruFocus ranks Keyence's financial strength as 10 out of 10, suggesting strong balance sheet. This is the debt and cash of Keyence over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Keyence has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4.9 billion and earnings of $7.102 a share. Its operating margin is 50.16%, which ranks better than 100% of the companies in Hardware industry. Overall, the profitability of Keyence is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Keyence 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. Keyence's 3-year average revenue growth rate is better than 88% of the companies in Hardware industry. Keyence's 3-year average EBITDA growth rate is 16.8%, which ranks better than 68% of the companies in Hardware 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, Keyence's return on invested capital is 21.29, and its cost of capital is 5.34. The historical ROIC vs WACC comparison of Keyence is shown below:
In conclusion, the stock of Keyence (OTCPK:KYCCF, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 68% of the companies in Hardware industry. To learn more about Keyence stock, you can check out its 30-year Financials here.
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