The stock of Ferro (NYSE:FOE, 30-year Financials) is believed to be 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 $21.575 per share and the market cap of $1.8 billion, Ferro stock gives every indication of being significantly overvalued. GF Value for Ferro is shown in the chart below.
Because Ferro is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 2.61% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Ferro has a cash-to-debt ratio of 0.34, which which ranks worse than 71% of the companies in Chemicals industry. The overall financial strength of Ferro is 5 out of 10, which indicates that the financial strength of Ferro is fair. This is the debt and cash of Ferro 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. Ferro has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $995 million and earnings of $1.62 a share. Its operating margin of 10.86% in the middle range of the companies in Chemicals industry. Overall, GuruFocus ranks Ferro's profitability as fair. This is the revenue and net income of Ferro 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 Ferro is -0.4%, which ranks in the middle range of the companies in Chemicals industry. The 3-year average EBITDA growth rate is -11.1%, which ranks worse than 80% of the companies in Chemicals 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, Ferro's ROIC was 5.02, while its WACC came in at 8.46. The historical ROIC vs WACC comparison of Ferro is shown below:
In summary, the stock of Ferro (NYSE:FOE, 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 worse than 80% of the companies in Chemicals industry. To learn more about Ferro stock, you can check out its 30-year Financials here.
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