NetScout Systems (NTCT): A Hidden Gem or a Mirage? A Comprehensive Analysis of Its Intrinsic Value
Despite a daily loss of 7.02% and a 3-month loss of 15.34%, NetScout Systems Inc (NASDAQ:NTCT) has an Earnings Per Share (EPS) (EPS) of 0.85. Is the stock modestly undervalued? This article aims to answer this question by analyzing the company's valuation. Read on to discover the intrinsic value of NetScout Systems (NASDAQ:NTCT).
Company Overview
NetScout Systems Inc is a renowned provider of service assurance and cybersecurity solutions to enterprise and government networks. The company's solutions, based on proprietary adaptive service intelligence technology, help customers monitor performance issues and identify network-based security threats. With its primary revenue derived from the sale of network management tools and security solutions, the company operates across the USA, Europe, Asia, and the rest of the world.
Understanding the GF Value
The GF Value is an estimation of a stock's intrinsic value. The GF Value Line on our summary page gives an overview of the fair value at which the stock should ideally be traded. It is calculated based on three factors:
Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at.
GuruFocus adjustment factor based on the company's past returns and growth.
Future estimates of the business performance.
NetScout Systems (NASDAQ:NTCT) appears to be modestly undervalued based on GuruFocus' valuation method. The GF Value estimates the stock's fair value based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns. With its current price of $26.1 per share, NetScout Systems has a market cap of $1.90 billion, suggesting it is modestly undervalued.
As NetScout Systems is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to 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. NetScout Systems has a cash-to-debt ratio of 2.43, which ranks worse than 50.61% of 2721 companies in the Software industry. Based on this, GuruFocus ranks NetScout Systems's financial strength as 8 out of 10, suggesting a strong balance sheet.
Profitability and Growth
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. NetScout Systems has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $916.90 million and Earnings Per Share (EPS) of $0.85. Its operating margin of 8.95% is better than 68.07% of 2756 companies in the Software industry. Overall, GuruFocus ranks NetScout Systems's profitability as fair.
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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of NetScout Systems is 1.8%, which ranks worse than 66.47% of 2398 companies in the Software industry. The 3-year average EBITDA growth rate is 6.9%, which ranks worse than 54.66% of 1987 companies in the Software industry.
ROIC vs WACC
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, NetScout Systems's return on invested capital is 2.69, and its cost of capital is 8.03.
Conclusion
Overall, NetScout Systems (NASDAQ:NTCT) stock shows every sign of being modestly undervalued. The company's financial condition is strong and its profitability is fair. Its growth ranks worse than 54.66% of 1987 companies in the Software industry. To learn more about NetScout Systems stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
