Sally Beauty Holdings Inc (SBH, Financial) has recently experienced a 4.05% daily loss and a 3-month loss of 17.65%. Despite an Earnings Per Share (EPS) of 1.49, the question remains: is the stock significantly undervalued? This article aims to provide a comprehensive valuation analysis to answer this question. We invite you to read on for an in-depth exploration of Sally Beauty Holdings' financial performance and intrinsic value.
Introducing Sally Beauty Holdings Inc
Based in the United States, Sally Beauty Holdings Inc (SBH, Financial) is a professional beauty-products retailer with operations spread across multiple countries. The company operates through two business segments: Sally Beauty Supply and Beauty Systems Group, offering a range of products from hair color and care to skin care. Despite a current stock price of $9.72, the GuruFocus Fair Value (GF Value) estimates the stock's fair value at $15.24, suggesting significant undervaluation.
Understanding the GF Value
The GF Value is a proprietary measure that estimates a stock's intrinsic value based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. If a stock price is significantly above the GF Value Line, it is considered overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Sally Beauty Holdings' stock appears to be significantly undervalued according to the GF Value calculation. With the current price of $9.72 per share and a market cap of $1 billion, we believe that the long-term return of its stock is likely to be much higher than its business growth.
Assessing Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent capital loss. Therefore, it's essential to review a company's financial strength before deciding to buy its stock. A great starting point is to look at the cash-to-debt ratio and interest coverage. Sally Beauty Holdings' cash-to-debt ratio of 0.04 is worse than 91.7% of companies in the Retail - Cyclical industry, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies, especially those with consistent long-term profitability, poses less risk. Sally Beauty Holdings has been profitable for the past 10 years, with a revenue of $3.80 billion and an Earnings Per Share (EPS) of $1.49 over the past twelve months. Its operating margin is 8.8%, which ranks better than 74.45% of companies in the Retail - Cyclical industry, indicating strong profitability.
However, growth is a crucial factor in a company's valuation. Sally Beauty Holdings' 3-year average annual revenue growth is 2.4%, which ranks worse than 53.88% of companies in the Retail - Cyclical industry. The 3-year average EBITDA growth rate is -5.5%, ranking worse than 75.39% of companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate its profitability. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. Over the past 12 months, Sally Beauty Holdings' ROIC was 11.25, while its WACC was 6.4.
In conclusion, Sally Beauty Holdings' stock appears to be significantly undervalued. The company has fair financial strength and strong profitability, but its growth ranks worse than 75.39% of companies in the Retail - Cyclical industry. To learn more about Sally Beauty Holdings' stock, check out its 30-Year Financials here.
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