- By GF Value
The stock of Lannett Co (NYSE:LCI, 30-year Financials) gives every indication of being 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 $4.6 per share and the market cap of $190.7 million, Lannett Co stock gives every indication of being modestly undervalued. GF Value for Lannett Co is shown in the chart below.
Because Lannett Co is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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. Lannett Co has a cash-to-debt ratio of 0.13, which which ranks worse than 85% of the companies in Drug Manufacturers industry. The overall financial strength of Lannett Co is 3 out of 10, which indicates that the financial strength of Lannett Co is poor. This is the debt and cash of Lannett Co over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Lannett Co has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $510.7 million and loss of $4.96 a share. Its operating margin is 0.51%, which ranks in the middle range of the companies in Drug Manufacturers industry. Overall, the profitability of Lannett Co is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Lannett Co 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 Lannett Co is -6.5%, which ranks worse than 80% of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth is -21.2%, which ranks worse than 83% of the companies in Drug Manufacturers 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, Lannett Co's ROIC was 0.22, while its WACC came in at 6.97. The historical ROIC vs WACC comparison of Lannett Co is shown below:
In summary, The stock of Lannett Co (NYSE:LCI, 30-year Financials) is estimated to be modestly undervalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 83% of the companies in Drug Manufacturers industry. To learn more about Lannett Co stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.