The stock of Computer Services (OTCPK:CSVI, 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 $59.75 per share and the market cap of $1.6 billion, Computer Services stock shows every sign of being significantly overvalued. GF Value for Computer Services is shown in the chart below.
Because Computer Services is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7% over the past five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Computer Services has a cash-to-debt ratio of 10.08, which ranks better than 67% of the companies in Software industry. Based on this, GuruFocus ranks Computer Services's financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of Computer Services 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. Computer Services has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $288.6 million and earnings of $2.07 a share. Its operating margin is 25.54%, which ranks better than 93% of the companies in Software industry. Overall, GuruFocus ranks the profitability of Computer Services at 9 out of 10, which indicates strong profitability. This is the revenue and net income of Computer Services over the past years:
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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Computer Services is 7%, which ranks in the middle range of the companies in Software industry. The 3-year average EBITDA growth rate is 11%, which ranks in the middle range of the companies in Software industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Computer Services's ROIC was 19.65, while its WACC came in at 4.50. The historical ROIC vs WACC comparison of Computer Services is shown below:
In short, the stock of Computer Services (OTCPK:CSVI, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Software industry. To learn more about Computer Services stock, you can check out its 30-year Financials here.
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