- By GF Value
The stock of NACCO Industries (NYSE:NC, 30-year Financials) is believed to be significantly 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 $23.82 per share and the market cap of $170.3 million, NACCO Industries stock is estimated to be significantly undervalued. GF Value for NACCO Industries is shown in the chart below.
Because NACCO Industries is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth, which averaged 6.1% over the past 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. NACCO Industries has a cash-to-debt ratio of 1.43, which is in the middle range of the companies in the industry of Other Energy Sources. The overall financial strength of NACCO Industries is 5 out of 10, which indicates that the financial strength of NACCO Industries is fair. This is the debt and cash of NACCO Industries 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. NACCO Industries has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $135.9 million and earnings of $2.48 a share. Its operating margin is -28.61%, which ranks worse than 84% of the companies in the industry of Other Energy Sources. Overall, the profitability of NACCO Industries is ranked 4 out of 10, which indicates poor profitability. This is the revenue and net income of NACCO Industries 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 NACCO Industries is 6.1%, which ranks better than 66% of the companies in the industry of Other Energy Sources. The 3-year average EBITDA growth is -10.2%, which ranks worse than 70% of the companies in the industry of Other Energy Sources.
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, NACCO Industries's return on invested capital is -11.63, and its cost of capital is 6.56. The historical ROIC vs WACC comparison of NACCO Industries is shown below:
In closing, the stock of NACCO Industries (NYSE:NC, 30-year Financials) shows every sign of being significantly undervalued. The company's financial condition is fair and its profitability is poor. Its growth ranks worse than 70% of the companies in the industry of Other Energy Sources. To learn more about NACCO Industries stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.