Kirkland's Stock Shows Every Sign Of Being Significantly Overvalued
- By GF Value
The stock of Kirkland's (NAS:KIRK, 30-year Financials) is believed 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 $23.94 per share and the market cap of $341.2 million, Kirkland's stock appears to be significantly overvalued. GF Value for Kirkland's is shown in the chart below.
Because Kirkland's is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Kirkland's has a cash-to-debt ratio of 0.40, which which ranks in the middle range of the companies in the industry of Retail - Cyclical. The overall financial strength of Kirkland's is 5 out of 10, which indicates that the financial strength of Kirkland's is fair. This is the debt and cash of Kirkland's 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. Kirkland's has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $589.8 million and earnings of $1.63 a share. Its operating margin of 7.54% better than 71% of the companies in the industry of Retail - Cyclical. Overall, GuruFocus ranks Kirkland's's profitability as fair. This is the revenue and net income of Kirkland's over the past years:
Growth is probably one of the most important factors 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. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Kirkland's's 3-year average revenue growth rate is in the middle range of the companies in the industry of Retail - Cyclical. Kirkland's's 3-year average EBITDA growth rate is -2.4%, which ranks in the middle range of the companies in the industry of Retail - Cyclical.
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, Kirkland's's return on invested capital is 10.61, and its cost of capital is 9.00. The historical ROIC vs WACC comparison of Kirkland's is shown below:
In conclusion, Kirkland's (NAS:KIRK, 30-year Financials) stock appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Retail - Cyclical. To learn more about Kirkland's stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
