The stock of Patrick Industries (NAS:PATK, 30-year Financials) gives every indication of being 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 $93.74 per share and the market cap of $2.2 billion, Patrick Industries stock appears to be significantly overvalued. GF Value for Patrick Industries is shown in the chart below.
Because Patrick Industries is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 17.5% over the past five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Patrick Industries has a cash-to-debt ratio of 0.05, which is in the bottom 10% of the companies in Vehicles & Parts industry. GuruFocus ranks the overall financial strength of Patrick Industries at 4 out of 10, which indicates that the financial strength of Patrick Industries is poor. This is the debt and cash of Patrick Industries 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. Patrick Industries has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.5 billion and earnings of $4.2 a share. Its operating margin is 6.97%, which ranks better than 70% of the companies in Vehicles & Parts industry. Overall, the profitability of Patrick Industries is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Patrick Industries 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. Patrick Industries's 3-year average revenue growth rate is better than 90% of the companies in Vehicles & Parts industry. Patrick Industries's 3-year average EBITDA growth rate is 19.2%, which ranks better than 85% of the companies in Vehicles & Parts industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Patrick Industries's return on invested capital is 9.95, and its cost of capital is 13.36. The historical ROIC vs WACC comparison of Patrick Industries is shown below:
Overall, Patrick Industries (NAS:PATK, 30-year Financials) stock gives every indication of being significantly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks better than 85% of the companies in Vehicles & Parts industry. To learn more about Patrick Industries stock, you can check out its 30-year Financials here.
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