The stock of Pan American Silver (NAS:PAAS, 30-year Financials) is believed to be modestly 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 $28.41 per share and the market cap of $6 billion, Pan American Silver stock gives every indication of being modestly overvalued. GF Value for Pan American Silver is shown in the chart below.
Because Pan American Silver is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 6.2% over the past three years and is estimated to grow 13.02% annually over the next three to five years.
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. Pan American Silver has a cash-to-debt ratio of 6.69, which ranks in the middle range of the companies in Metals & Mining industry. Based on this, GuruFocus ranks Pan American Silver’s financial strength as 8 out of 10, suggesting strong balance sheet. This is the debt and cash of Pan American Silver 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. Pan American Silver has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $1.3 billion and earnings of $1.17 a share. Its operating margin of 17.12% better than 72% of the companies in Metals & Mining industry. Overall, GuruFocus ranks Pan American Silver’s profitability as fair. This is the revenue and net income of Pan American Silver 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 Pan American Silver is 6.2%, which ranks better than 66% of the companies in Metals & Mining industry. The 3-year average EBITDA growth rate is 17.8%, which ranks in the middle range of the companies in Metals & Mining 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, Pan American Silver’s return on invested capital is 6.39, and its cost of capital is 8.27. The historical ROIC vs WACC comparison of Pan American Silver is shown below:
In short, the stock of Pan American Silver (NAS:PAAS, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks in the middle range of the companies in Metals & Mining industry. To learn more about Pan American Silver stock, you can check out its 30-year Financials here.
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