Appen Stock Is Believed To Be Possible Value Trap
- By GF Value
The stock of Appen (ASX:APX, 30-year Financials) appears to be possible value trap, 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 AUD 16.89 per share and the market cap of AUD 2.1 billion, Appen stock is believed to be possible value trap. GF Value for Appen is shown in the chart below.
The reason we think that Appen stock might be a value trap is because
Link: These companies may deliever higher future returns at reduced risk.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Appen has a cash-to-debt ratio of 3.11, which is in the middle range of the companies in Software industry. The overall financial strength of Appen is 8 out of 10, which indicates that the financial strength of Appen is strong. This is the debt and cash of Appen over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Appen has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of AUD 599.4 million and earnings of AUD 0.409 a share. Its operating margin is 9.30%, which ranks better than 67% of the companies in Software industry. Overall, the profitability of Appen is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Appen 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. Appen's 3-year average revenue growth rate is better than 92% of the companies in Software industry. Appen's 3-year average EBITDA growth rate is 56.2%, which ranks better than 90% of the companies in Software 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, Appen's ROIC was 9.20, while its WACC came in at 9.65. The historical ROIC vs WACC comparison of Appen is shown below:
In short, Appen (ASX:APX, 30-year Financials) stock appears to be possible value trap. The company's financial condition is strong and its profitability is fair. Its growth ranks better than 90% of the companies in Software industry. To learn more about Appen 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.
