The stock of PagSeguro Digital (NYSE:PAGS, 30-year Financials) shows every sign of being 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 $43.39 per share and the market cap of $14.3 billion, PagSeguro Digital stock shows every sign of being modestly overvalued. GF Value for PagSeguro Digital is shown in the chart below.
Because PagSeguro Digital is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 10.6% over the past three years and is estimated to grow 22.68% annually over the next three to five years.
Link: These companies may deliever higher future returns at reduced risk.
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. PagSeguro Digital has a cash-to-debt ratio of 10000.00, which is better than 100% of the companies in Software industry. GuruFocus ranks the overall financial strength of PagSeguro Digital at 8 out of 10, which indicates that the financial strength of PagSeguro Digital is strong. This is the debt and cash of PagSeguro Digital 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. PagSeguro Digital has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $1.3 billion and earnings of $0.763 a share. Its operating margin of 26.06% better than 93% of the companies in Software industry. Overall, GuruFocus ranks PagSeguro Digital's profitability as strong. This is the revenue and net income of PagSeguro Digital over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of PagSeguro Digital is 10.6%, which ranks in the middle range of the companies in Software industry. The 3-year average EBITDA growth is 11.1%, which ranks in the middle range of the companies in Software 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, PagSeguro Digital's return on invested capital is 17.07, and its cost of capital is 12.45. The historical ROIC vs WACC comparison of PagSeguro Digital is shown below:
In short, the stock of PagSeguro Digital (NYSE:PAGS, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks in the middle range of the companies in Software industry. To learn more about PagSeguro Digital stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
