ITT Stock Is Believed To Be Significantly Overvalued
- By GF Value
The stock of ITT (NYSE:ITT, 30-year Financials) is estimated 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 $91.2 per share and the market cap of $7.8 billion, ITT stock is estimated to be significantly overvalued. GF Value for ITT is shown in the chart below.
Because ITT is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 1.78% annually over the next three to five years.
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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. ITT has a cash-to-debt ratio of 4.06, which is better than 70% of the companies in Industrial Products industry. The overall financial strength of ITT is 7 out of 10, which indicates that the financial strength of ITT is fair. This is the debt and cash of ITT 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. ITT has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $2.5 billion and earnings of $0.81 a share. Its operating margin of 7.28% in the middle range of the companies in Industrial Products industry. Overall, GuruFocus ranks ITT's profitability as fair. This is the revenue and net income of ITT 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 ITT is -0.8%, which ranks in the middle range of the companies in Industrial Products industry. The 3-year average EBITDA growth rate is -10.7%, which ranks worse than 78% of the companies in Industrial Products industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, ITT's ROIC was 4.92, while its WACC came in at 10.99. The historical ROIC vs WACC comparison of ITT is shown below:
In conclusion, ITT (NYSE:ITT, 30-year Financials) stock is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 78% of the companies in Industrial Products industry. To learn more about ITT stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
