– By GF Value
The stock of Shoe Carnival (NAS:SCVL, 30-year Financials) is believed 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 $60.44 per share and the market cap of $852.5 million, Shoe Carnival stock is believed to be significantly overvalued. GF Value for Shoe Carnival is shown in the chart below.
Because Shoe Carnival is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 3% over the past three years and is estimated to grow 3.33% annually over the next three to five years.
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. Shoe Carnival has a cash-to-debt ratio of 0.46, which which ranks in the middle range of the companies in the industry of Retail – Cyclical. The overall financial strength of Shoe Carnival is 6 out of 10, which indicates that the financial strength of Shoe Carnival is fair. This is the debt and cash of Shoe Carnival 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. Shoe Carnival has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $976.8 million and earnings of $1.1 a share. Its operating margin is 2.24%, which ranks in the middle range of the companies in the industry of Retail – Cyclical. Overall, GuruFocus ranks the profitability of Shoe Carnival at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Shoe Carnival 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 Shoe Carnival is 3%, which ranks in the middle range of the companies in the industry of Retail – Cyclical. The 3-year average EBITDA growth is -11%, which ranks worse than 76% of the companies in the industry of Retail – Cyclical.
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, Shoe Carnival’s return on invested capital is 3.32, and its cost of capital is 8.81. The historical ROIC vs WACC comparison of Shoe Carnival is shown below:
Overall, Shoe Carnival (NAS:SCVL, 30-year Financials) stock is estimated to be significantly overvalued. The company’s financial condition is fair and its profitability is fair. Its growth ranks worse than 76% of the companies in the industry of Retail – Cyclical. To learn more about Shoe Carnival stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.