RH Stock Gives Every Indication Of Being Significantly Overvalued

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Apr 30, 2021
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The stock of RH (NYSE:RH, 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 $688.02 per share and the market cap of $14.4 billion, RH stock shows every sign of being significantly overvalued. GF Value for RH is shown in the chart below.

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Because RH is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 5% over the past three years and is estimated to grow 10.01% annually over the next three to 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. RH has a cash-to-debt ratio of 0.06, which which ranks in the bottom 10% of the companies in the industry of Retail - Cyclical. The overall financial strength of RH is 5 out of 10, which indicates that the financial strength of RH is fair. This is the debt and cash of RH over the past years:

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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. RH has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $2.8 billion and earnings of $9.49 a share. Its operating margin is 16.39%, which ranks better than 92% of the companies in the industry of Retail - Cyclical. Overall, the profitability of RH is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of RH over the past years:

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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 RH is 5%, which ranks better than 68% of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth rate is 50.8%, which ranks better than 92% of the companies in the industry of Retail - Cyclical.

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, RH's ROIC is 13.36 while its WACC came in at 15.32. The historical ROIC vs WACC comparison of RH is shown below:

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In short, RH (NYSE:RH, 30-year Financials) stock appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 92% of the companies in the industry of Retail - Cyclical. To learn more about RH stock, you can check out its 30-year Financials here.

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