– By GF Value
The stock of POSCO (NYSE:PKX, 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 $73.98 per share and the market cap of $23.6 billion, POSCO stock shows every sign of being significantly overvalued. GF Value for POSCO is shown in the chart below.
Because POSCO is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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. POSCO has a cash-to-debt ratio of 0.80, which which ranks better than 67% of the companies in Steel industry. The overall financial strength of POSCO is 5 out of 10, which indicates that the financial strength of POSCO is fair. This is the debt and cash of POSCO 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. POSCO has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $49.4 billion and earnings of $4.394 a share. Its operating margin of 4.16% in the middle range of the companies in Steel industry. Overall, GuruFocus ranks POSCO’s profitability as fair. This is the revenue and net income of POSCO over the past years:
Growth is probably one of the most important factors 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. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company’s revenue and earnings are declining, the value of the company will decrease. POSCO’s 3-year average revenue growth rate is in the middle range of the companies in Steel industry. POSCO’s 3-year average EBITDA growth rate is 2.2%, which ranks in the middle range of the companies in Steel industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, POSCO’s return on invested capital is 3.62, and its cost of capital is 9.56. The historical ROIC vs WACC comparison of POSCO is shown below:
In closing, the stock of POSCO (NYSE:PKX, 30-year Financials) shows every sign of being significantly overvalued. The company’s financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Steel industry. To learn more about POSCO stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.