- By GF Value
The stock of Lincoln National (NYSE:LNC, 30-year Financials) is estimated to be fairly valued, 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 $63.365 per share and the market cap of $12.2 billion, Lincoln National stock gives every indication of being fairly valued. GF Value for Lincoln National is shown in the chart below.
Because Lincoln National is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 12.5% over the past three years and is estimated to grow 3.13% annually over the next three to five years.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Lincoln National has a cash-to-debt ratio of 0.26, which ranks worse than 88% of the companies in Insurance industry. Based on this, GuruFocus ranks Lincoln National's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Lincoln National 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. Lincoln National has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $17.4 billion and earnings of $2.41 a share. Its operating margin is 0.00%, which ranks in the bottom 10% of the companies in Insurance industry. Overall, the profitability of Lincoln National is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Lincoln National 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 Lincoln National is 12.5%, which ranks better than 80% of the companies in Insurance industry. The 3-year average EBITDA growth rate is -14.5%, which ranks worse than 77% of the companies in Insurance industry.
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, Lincoln National's ROIC is 0.25 while its WACC came in at 11.68. The historical ROIC vs WACC comparison of Lincoln National is shown below:
In summary, The stock of Lincoln National (NYSE:LNC, 30-year Financials) is estimated to be fairly valued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 77% of the companies in Insurance industry. To learn more about Lincoln National stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.