- By GF Value
The stock of Huaneng Power International (NYSE:HNP, 30-year Financials) is estimated 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 $14.48 per share and the market cap of $5.7 billion, Huaneng Power International stock is believed to be modestly undervalued. GF Value for Huaneng Power International is shown in the chart below.
Because Huaneng Power International is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 2.5% over the past three years and is estimated to grow 2.87% annually over the next three to five years.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Huaneng Power International has a cash-to-debt ratio of 0.06, which is worse than 77% of the companies in the industry of Utilities - Independent Power Producers. The overall financial strength of Huaneng Power International is 3 out of 10, which indicates that the financial strength of Huaneng Power International is poor. This is the debt and cash of Huaneng Power International 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. Huaneng Power International has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $25 billion and earnings of $0.104 a share. Its operating margin of 12.79% in the middle range of the companies in the industry of Utilities - Independent Power Producers. Overall, GuruFocus ranks Huaneng Power International's profitability as fair. This is the revenue and net income of Huaneng Power International 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 Huaneng Power International is 2.5%, which ranks in the middle range of the companies in the industry of Utilities - Independent Power Producers. The 3-year average EBITDA growth rate is 1.9%, which ranks in the middle range of the companies in the industry of Utilities - Independent Power Producers.
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, Huaneng Power International's ROIC is 2.45 while its WACC came in at 2.43. The historical ROIC vs WACC comparison of Huaneng Power International is shown below:
Overall, Huaneng Power International (NYSE:HNP, 30-year Financials) stock shows every sign of being modestly undervalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Utilities - Independent Power Producers. To learn more about Huaneng Power International 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.