The stock of Whitehaven Coal (OTCPK:WHITF, 30-year Financials) is estimated to be possible value trap, 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 $1.48 per share and the market cap of $1.5 billion, Whitehaven Coal stock is estimated to be possible value trap. GF Value for Whitehaven Coal is shown in the chart below.
The reason we think that Whitehaven Coal stock might be a value trap is because Whitehaven Coal has an Altman Z-score of 1.13, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the company, please go here.
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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. Whitehaven Coal has a cash-to-debt ratio of 0.10, which ranks worse than 86% of the companies in the industry of Other Energy Sources. Based on this, GuruFocus ranks Whitehaven Coal’s financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Whitehaven Coal 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. Whitehaven Coal has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $1.1 billion and loss of $0.07 a share. Its operating margin of 2.13% in the middle range of the companies in the industry of Other Energy Sources. Overall, GuruFocus ranks Whitehaven Coal’s profitability as fair. This is the revenue and net income of Whitehaven Coal 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 performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Whitehaven Coal is -1.1%, which ranks in the middle range of the companies in the industry of Other Energy Sources. The 3-year average EBITDA growth rate is -23.6%, which ranks worse than 82% of the companies in the industry of Other Energy Sources.
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, Whitehaven Coal’s ROIC is 0.48 while its WACC came in at 4.01. The historical ROIC vs WACC comparison of Whitehaven Coal is shown below:
In short, the stock of Whitehaven Coal (OTCPK:WHITF, 30-year Financials) shows every sign of being possible value trap. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 82% of the companies in the industry of Other Energy Sources. To learn more about Whitehaven Coal stock, you can check out its 30-year Financials here.
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