The stock of RH (NYSE:RH, 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 $613.22 per share and the market cap of $12.9 billion, RH stock is estimated to be significantly overvalued. GF Value for RH is shown in the chart below.
Because RH is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 5% over the past three years and is estimated to grow 10.22% 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. RH has a cash-to-debt ratio of 0.06, which is in the bottom 10% of the companies in the industry of Retail - Cyclical. GuruFocus ranks the overall financial strength of RH at 4 out of 10, which indicates that the financial strength of RH is poor. This is the debt and cash of RH over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. RH has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $2.8 billion and earnings of $9.49 a share. Its operating margin is 16.39%, which ranks better than 91% of the companies in the industry of Retail - Cyclical. Overall, the profitability of RH is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of RH 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 RH is 5%, which ranks better than 69% of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth is 50.8%, which ranks better than 91% of the companies in the industry of Retail - Cyclical.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, RH's ROIC is 13.36 while its WACC came in at 15.00. The historical ROIC vs WACC comparison of RH is shown below:
To conclude, the stock of RH (NYSE:RH, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 91% of the companies in the industry of Retail - Cyclical. To learn more about RH stock, you can check out its 30-year Financials here.
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