- By GF Value
The stock of Argan (NYSE:AGX, 30-year Financials) shows every sign of being modestly 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 $48.99 per share and the market cap of $772.4 million, Argan stock is estimated to be modestly overvalued. GF Value for Argan is shown in the chart below.
Because Argan is relatively overvalued, the long-term return of its stock is likely to be lower than its 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. Argan has a cash-to-debt ratio of 10000.00, which which ranks better than 100% of the companies in Construction industry. The overall financial strength of Argan is 8 out of 10, which indicates that the financial strength of Argan is strong. This is the debt and cash of Argan 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. Argan has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $392.2 million and earnings of $1.507 a share. Its operating margin of 5.87% in the middle range of the companies in Construction industry. Overall, GuruFocus ranks Argan's profitability as fair. This is the revenue and net income of Argan 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. Argan's 3-year average revenue growth rate is in the bottom 10% of the companies in Construction industry. Argan's 3-year average EBITDA growth rate is -37.2%, which ranks in the bottom 10% of the companies in 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, Argan's ROIC was 13.27, while its WACC came in at 5.26. The historical ROIC vs WACC comparison of Argan is shown below:
Overall, Argan (NYSE:AGX, 30-year Financials) stock appears to be modestly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Construction industry. To learn more about Argan stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.