– By GF Value
The stock of Century Communities (NYSE:CCS, 30-year Financials) appears to be 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 $60.655 per share and the market cap of $2 billion, Century Communities stock gives every indication of being significantly overvalued. GF Value for Century Communities is shown in the chart below.
Because Century Communities is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 17.5% over the past three years and is estimated to grow 28.55% 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. Century Communities has a cash-to-debt ratio of 0.34, which ranks in the middle range of the companies in Homebuilding & Construction industry. Based on this, GuruFocus ranks Century Communities’s financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Century Communities 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. Century Communities has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $3.2 billion and earnings of $6.13 a share. Its operating margin is 8.69%, which ranks in the middle range of the companies in Homebuilding & Construction industry. Overall, the profitability of Century Communities is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Century Communities over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Century Communities is 17.5%, which ranks better than 82% of the companies in Homebuilding & Construction industry. The 3-year average EBITDA growth is 34.8%, which ranks better than 87% of the companies in Homebuilding & Construction industry.
Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Century Communities’s ROIC was 9.58, while its WACC came in at 8.74. The historical ROIC vs WACC comparison of Century Communities is shown below:
In conclusion, the stock of Century Communities (NYSE:CCS, 30-year Financials) appears to be significantly overvalued. The company’s financial condition is poor and its profitability is fair. Its growth ranks better than 87% of the companies in Homebuilding & Construction industry. To learn more about Century Communities stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.