The stock of Twin Disc (NAS:TWIN, 30-year Financials) gives every indication 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 $14.39 per share and the market cap of $196.4 million, Twin Disc stock gives every indication of being significantly overvalued. GF Value for Twin Disc is shown in the chart below.
Because Twin Disc is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7.8% over the past five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Twin Disc has a cash-to-debt ratio of 0.20, which which ranks worse than 85% of the companies in Industrial Products industry. The overall financial strength of Twin Disc is 4 out of 10, which indicates that the financial strength of Twin Disc is poor. This is the debt and cash of Twin Disc over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Twin Disc has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $211.6 million and loss of $0.75 a share. Its operating margin is -3.67%, which ranks worse than 83% of the companies in Industrial Products industry. Overall, GuruFocus ranks the profitability of Twin Disc at 5 out of 10, which indicates fair profitability. This is the revenue and net income of Twin Disc 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 Twin Disc is 7.8%, which ranks better than 72% of the companies in Industrial Products industry. The 3-year average EBITDA growth rate is -126.1%, which ranks in the bottom 10% of the companies in Industrial 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, Twin Disc’s return on invested capital is -2.48, and its cost of capital is 8.26. The historical ROIC vs WACC comparison of Twin Disc is shown below:
In conclusion, The stock of Twin Disc (NAS:TWIN, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Industrial Products industry. To learn more about Twin Disc stock, you can check out its 30-year Financials here.
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