Companhia Siderurgica Nacional Stock Appears To Be Significantly Overvalued
- By GF Value
The stock of Companhia Siderurgica Nacional (NYSE:SID, 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 $6.31 per share and the market cap of $8.7 billion, Companhia Siderurgica Nacional stock gives every indication of being significantly overvalued. GF Value for Companhia Siderurgica Nacional is shown in the chart below.
Because Companhia Siderurgica Nacional is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 13.4% over the past three years and is estimated to grow 11.84% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Companhia Siderurgica Nacional has a cash-to-debt ratio of 0.24, which ranks in the middle range of the companies in Steel industry. Based on this, GuruFocus ranks Companhia Siderurgica Nacional's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Companhia Siderurgica Nacional 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. Companhia Siderurgica Nacional has been profitable 6 years over the past 10 years. During the past 12 months, the company had revenues of $5.5 billion and earnings of $0.199 a share. Its operating margin of 19.52% better than 96% of the companies in Steel industry. Overall, GuruFocus ranks Companhia Siderurgica Nacional's profitability as fair. This is the revenue and net income of Companhia Siderurgica Nacional 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. Companhia Siderurgica Nacional's 3-year average revenue growth rate is better than 75% of the companies in Steel industry. Companhia Siderurgica Nacional's 3-year average EBITDA growth rate is 9.4%, 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, Companhia Siderurgica Nacional's return on invested capital is 7.47, and its cost of capital is 8.78. The historical ROIC vs WACC comparison of Companhia Siderurgica Nacional is shown below:
To conclude, The stock of Companhia Siderurgica Nacional (NYSE:SID, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Steel industry. To learn more about Companhia Siderurgica Nacional stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
