Meritor Stock Is Believed To Be Significantly Overvalued
- By GF Value
The stock of Meritor (NYSE:MTOR, 30-year Financials) appears 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 $27.38 per share and the market cap of $2 billion, Meritor stock gives every indication of being significantly overvalued. GF Value for Meritor is shown in the chart below.
Because Meritor is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 2.8% over the past three years and is estimated to grow 2.50% annually over the next three to five years.
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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. Meritor has a cash-to-debt ratio of 0.27, which ranks worse than 70% of the companies in Vehicles & Parts industry. Based on this, GuruFocus ranks Meritor's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Meritor over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Meritor has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $3.1 billion and earnings of $0.84 a share. Its operating margin is 2.86%, which ranks in the middle range of the companies in Vehicles & Parts industry. Overall, the profitability of Meritor is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Meritor 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 Meritor is 2.8%, which ranks in the middle range of the companies in Vehicles & Parts industry. The 3-year average EBITDA growth is 0.8%, which ranks in the middle range of the companies in Vehicles & Parts 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, Meritor's ROIC was 3.09, while its WACC came in at 10.39. The historical ROIC vs WACC comparison of Meritor is shown below:
Overall, Meritor (NYSE:MTOR, 30-year Financials) stock is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Vehicles & Parts industry. To learn more about Meritor stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
