Cohu Stock Gives Every Indication Of Being Significantly Overvalued
- By GF Value
The stock of Cohu (NAS:COHU, 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 $46 per share and the market cap of $2.2 billion, Cohu stock is believed to be significantly overvalued. GF Value for Cohu is shown in the chart below.
Because Cohu is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7.6% over the past five years.
Link: These companies may deliever higher future returns at reduced risk.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Cohu has a cash-to-debt ratio of 0.49, which is worse than 75% of the companies in Semiconductors industry. GuruFocus ranks the overall financial strength of Cohu at 5 out of 10, which indicates that the financial strength of Cohu is fair. This is the debt and cash of Cohu 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. Cohu has been profitable 5 years over the past 10 years. During the past 12 months, the company had revenues of $636 million and loss of $0.35 a share. Its operating margin of 2.78% in the middle range of the companies in Semiconductors industry. Overall, GuruFocus ranks Cohu's profitability as fair. This is the revenue and net income of Cohu 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 Cohu is 7.6%, which ranks in the middle range of the companies in Semiconductors industry. The 3-year average EBITDA growth rate is -6.2%, which ranks worse than 75% of the companies in Semiconductors 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, Cohu's return on invested capital is 2.30, and its cost of capital is 11.40. The historical ROIC vs WACC comparison of Cohu is shown below:
In summary, the stock of Cohu (NAS:COHU, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 75% of the companies in Semiconductors industry. To learn more about Cohu 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.
