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CoStar Group Stock Appears To Be Modestly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of CoStar Group (NAS:CSGP, 30-year Financials) appears to be 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 $861.38 per share and the market cap of $33.9 billion, CoStar Group stock is believed to be modestly overvalued. GF Value for CoStar Group is shown in the chart below.


CoStar Group Stock Appears To Be Modestly Overvalued
CoStar Group Stock Appears To Be Modestly Overvalued

Because CoStar Group is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 14.6% over the past three years and is estimated to grow 17.16% annually over the next three to 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. CoStar Group has a cash-to-debt ratio of 3.23, which is better than 82% of the companies in Real Estate industry. GuruFocus ranks the overall financial strength of CoStar Group at 7 out of 10, which indicates that the financial strength of CoStar Group is fair. This is the debt and cash of CoStar Group over the past years:

CoStar Group Stock Appears To Be Modestly Overvalued
CoStar Group Stock Appears To Be Modestly Overvalued

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. CoStar Group has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $1.7 billion and earnings of $5.97 a share. Its operating margin is 17.43%, which ranks in the middle range of the companies in Real Estate industry. Overall, the profitability of CoStar Group is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of CoStar Group over the past years:

CoStar Group Stock Appears To Be Modestly Overvalued
CoStar Group Stock Appears To Be Modestly Overvalued

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 CoStar Group is 14.6%, which ranks better than 72% of the companies in Real Estate industry. The 3-year average EBITDA growth rate is 14.4%, which ranks better than 66% of the companies in Real Estate 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, CoStar Group's return on invested capital is 8.41, and its cost of capital is 6.79. The historical ROIC vs WACC comparison of CoStar Group is shown below:

CoStar Group Stock Appears To Be Modestly Overvalued
CoStar Group Stock Appears To Be Modestly Overvalued

In short, the stock of CoStar Group (NAS:CSGP, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 66% of the companies in Real Estate industry. To learn more about CoStar Group stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.