The stock of Weyerhaeuser Co (NYSE:WY, 30-year Financials) appears to be 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 $40 per share and the market cap of $30 billion, Weyerhaeuser Co stock gives every indication of being modestly overvalued. GF Value for Weyerhaeuser Co is shown in the chart below.
Because Weyerhaeuser Co is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 1.9% over the past three years and is estimated to grow 3.53% annually over the next three to 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. Weyerhaeuser Co has a cash-to-debt ratio of 0.19, which is better than 78% of the companies in REITs industry. GuruFocus ranks the overall financial strength of Weyerhaeuser Co at 5 out of 10, which indicates that the financial strength of Weyerhaeuser Co is fair. This is the debt and cash of Weyerhaeuser Co 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. Weyerhaeuser Co has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $8.3 billion and earnings of $1.78 a share. Its operating margin of 27.97% worse than 70% of the companies in REITs industry. Overall, GuruFocus ranks Weyerhaeuser Co's profitability as fair. This is the revenue and net income of Weyerhaeuser Co 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 Weyerhaeuser Co is 1.9%, which ranks in the middle range of the companies in REITs industry. The 3-year average EBITDA growth is 5.6%, which ranks better than 71% of the companies in REITs 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, Weyerhaeuser Co's return on invested capital is 11.82, and its cost of capital is 11.62. The historical ROIC vs WACC comparison of Weyerhaeuser Co is shown below:
In conclusion, the stock of Weyerhaeuser Co (NYSE:WY, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 71% of the companies in REITs industry. To learn more about Weyerhaeuser Co stock, you can check out its 30-year Financials here.
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