- By GF Value
The stock of Catalent (NYSE:CTLT, 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 $107.4 per share and the market cap of $18.3 billion, Catalent stock is believed to be significantly overvalued. GF Value for Catalent is shown in the chart below.
Because Catalent is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7.4% over the past three years and is estimated to grow 14.61% 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. Catalent has a cash-to-debt ratio of 0.27, which which ranks worse than 73% of the companies in Drug Manufacturers industry. The overall financial strength of Catalent is 5 out of 10, which indicates that the financial strength of Catalent is fair. This is the debt and cash of Catalent 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. Catalent has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $3.5 billion and earnings of $1.79 a share. Its operating margin is 14.32%, which ranks better than 72% of the companies in Drug Manufacturers industry. Overall, the profitability of Catalent is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Catalent over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Catalent is 7.4%, which ranks in the middle range of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth rate is 12.7%, which ranks in the middle range of the companies in Drug Manufacturers industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Catalent's ROIC is 7.09 while its WACC came in at 9.23. The historical ROIC vs WACC comparison of Catalent is shown below:
In summary, the stock of Catalent (NYSE:CTLT, 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 Drug Manufacturers industry. To learn more about Catalent 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.