- By GF Value
The stock of Discovery (JSE:DSY, 30-year Financials) appears to be modestly undervalued, 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 ZAR 142.56 per share and the market cap of ZAR 94.2 billion, Discovery stock gives every indication of being modestly undervalued. GF Value for Discovery is shown in the chart below.
Because Discovery is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 11.2% over the past five years.
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. Discovery has a cash-to-debt ratio of 1.01, which is worse than 66% of the companies in Insurance industry. GuruFocus ranks the overall financial strength of Discovery at 4 out of 10, which indicates that the financial strength of Discovery is poor. This is the debt and cash of Discovery over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Discovery has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of ZAR 68.9 billion and loss of ZAR 0.177 a share. Its operating margin is 0.00%, which ranks in the bottom 10% of the companies in Insurance industry. Overall, GuruFocus ranks the profitability of Discovery at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Discovery over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Discovery is 11.2%, which ranks better than 77% of the companies in Insurance industry. The 3-year average EBITDA growth is -16.3%, which ranks worse than 79% of the companies in Insurance industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Discovery's return on invested capital is -0.08, and its cost of capital is 16.53. The historical ROIC vs WACC comparison of Discovery is shown below:
Overall, The stock of Discovery (JSE:DSY, 30-year Financials) is believed to be modestly undervalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 79% of the companies in Insurance industry. To learn more about Discovery stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.