The stock of Service International (NYSE:SCI, 30-year Financials) appears to be fairly valued, 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 $52.54 per share and the market cap of $8.8 billion, Service International stock gives every indication of being fairly valued. GF Value for Service International is shown in the chart below.
Because Service International is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 6.8% over the past five years.
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. Service International has a cash-to-debt ratio of 0.07, which is in the bottom 10% of the companies in Personal Services industry. GuruFocus ranks the overall financial strength of Service International at 3 out of 10, which indicates that the financial strength of Service International is poor. This is the debt and cash of Service International 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. Service International has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $3.8 billion and earnings of $3.78 a share. Its operating margin is 27.18%, which ranks better than 92% of the companies in Personal Services industry. Overall, the profitability of Service International is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Service International 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 Service International is 6.8%, which ranks better than 71% of the companies in Personal Services industry. The 3-year average EBITDA growth rate is 12.5%, which ranks in the middle range of the companies in Personal Services industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Service International’s return on invested capital is 5.79, and its cost of capital is 4.66. The historical ROIC vs WACC comparison of Service International is shown below:
In summary, the stock of Service International (NYSE:SCI, 30-year Financials) is believed to be fairly valued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Personal Services industry. To learn more about Service International stock, you can check out its 30-year Financials here.
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