The stock of Cactus (NYSE:WHD, 30-year Financials) shows every sign 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 $31.33 per share and the market cap of $2.4 billion, Cactus stock gives every indication of being significantly overvalued. GF Value for Cactus is shown in the chart below.
Because Cactus is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 0.4% 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. Cactus has a cash-to-debt ratio of 10.26, which is better than 78% of the companies in Oil & Gas industry. GuruFocus ranks the overall financial strength of Cactus at 6 out of 10, which indicates that the financial strength of Cactus is fair. This is the debt and cash of Cactus over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Cactus has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $348.6 million and earnings of $0.71 a share. Its operating margin is 20.63%, which ranks better than 84% of the companies in Oil & Gas industry. Overall, GuruFocus ranks the profitability of Cactus at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Cactus 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. Cactus's 3-year average revenue growth rate is in the middle range of the companies in Oil & Gas industry. Cactus's 3-year average EBITDA growth rate is -0.3%, which ranks in the middle range of the companies in Oil & Gas 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, Cactus's return on invested capital is 11.38, and its cost of capital is 16.75. The historical ROIC vs WACC comparison of Cactus is shown below:
In short, the stock of Cactus (NYSE:WHD, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Oil & Gas industry. To learn more about Cactus stock, you can check out its 30-year Financials here.
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