- By GF Value
The stock of Kadant (NYSE:KAI, 30-year Financials) shows every sign of being 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 $171.115 per share and the market cap of $2 billion, Kadant stock appears to be significantly overvalued. GF Value for Kadant is shown in the chart below.
Because Kadant is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 6.4% over the past three years and is estimated to grow 2.38% 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. Kadant has a cash-to-debt ratio of 0.30, which is worse than 79% of the companies in Industrial Products industry. The overall financial strength of Kadant is 6 out of 10, which indicates that the financial strength of Kadant is fair. This is the debt and cash of Kadant 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. Kadant has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $648.4 million and earnings of $5.11 a share. Its operating margin of 13.55% better than 79% of the companies in Industrial Products industry. Overall, GuruFocus ranks Kadant's profitability as strong. This is the revenue and net income of Kadant 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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Kadant is 6.4%, which ranks better than 67% of the companies in Industrial Products industry. The 3-year average EBITDA growth rate is 10.9%, which ranks better than 67% of the companies in Industrial Products 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, Kadant's return on invested capital is 8.38, and its cost of capital is 8.76.
In conclusion, the stock of Kadant (NYSE:KAI, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 67% of the companies in Industrial Products industry. To learn more about Kadant 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.