The stock of Canfor (OTCPK:CFPZF, 30-year Financials) appears 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 $23.05 per share and the market cap of $2.9 billion, Canfor stock is estimated to be significantly overvalued. GF Value for Canfor is shown in the chart below.
Because Canfor is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7.9% over the past three years and is estimated to grow 3.05% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Canfor has a cash-to-debt ratio of 0.70, which is in the middle range of the companies in Forest Products industry. The overall financial strength of Canfor is 7 out of 10, which indicates that the financial strength of Canfor is fair. This is the debt and cash of Canfor 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. Canfor has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $4.8 billion and earnings of $6.483 a share. Its operating margin is 23.02%, which ranks better than 96% of the companies in Forest Products industry. Overall, the profitability of Canfor is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Canfor over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Canfor's 3-year average revenue growth rate is better than 83% of the companies in Forest Products industry. Canfor's 3-year average EBITDA growth rate is 14.4%, which ranks better than 76% of the companies in Forest Products 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, Canfor's return on invested capital is 27.18, and its cost of capital is 12.13. The historical ROIC vs WACC comparison of Canfor is shown below:
In summary, the stock of Canfor (OTCPK:CFPZF, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 76% of the companies in Forest Products industry. To learn more about Canfor stock, you can check out its 30-year Financials here.
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