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Ormat Technologies Stock Shows Every Sign Of Being Modestly Overvalued

- By GF Value

The stock of Ormat Technologies (NYSE:ORA, 30-year Financials) appears to be modestly 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 $68.62 per share and the market cap of $3.8 billion, Ormat Technologies stock appears to be modestly overvalued. GF Value for Ormat Technologies is shown in the chart below.


Ormat Technologies Stock Shows Every Sign Of Being Modestly Overvalued
Ormat Technologies Stock Shows Every Sign Of Being Modestly Overvalued

Because Ormat Technologies is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which is estimated to grow 2.39% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

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. Ormat Technologies has a cash-to-debt ratio of 0.28, which which ranks in the middle range of the companies in the industry of Utilities - Independent Power Producers. The overall financial strength of Ormat Technologies is 4 out of 10, which indicates that the financial strength of Ormat Technologies is poor. This is the debt and cash of Ormat Technologies over the past years:

Ormat Technologies Stock Shows Every Sign Of Being Modestly Overvalued
Ormat Technologies Stock Shows Every Sign Of Being Modestly Overvalued

It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Ormat Technologies has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $679.6 million and earnings of $1.42 a share. Its operating margin is 27.24%, which ranks better than 70% of the companies in the industry of Utilities - Independent Power Producers. Overall, GuruFocus ranks the profitability of Ormat Technologies at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Ormat Technologies over the past years:

Ormat Technologies Stock Shows Every Sign Of Being Modestly Overvalued
Ormat Technologies Stock Shows Every Sign Of Being Modestly Overvalued

Growth is probably one of the most important factors 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. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Ormat Technologies's 3-year average revenue growth rate is in the middle range of the companies in the industry of Utilities - Independent Power Producers. Ormat Technologies's 3-year average EBITDA growth rate is 5.1%, which ranks in the middle range of the companies in the industry of Utilities - Independent Power Producers.

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, Ormat Technologies's return on invested capital is 3.60, and its cost of capital is 2.98. The historical ROIC vs WACC comparison of Ormat Technologies is shown below:

Ormat Technologies Stock Shows Every Sign Of Being Modestly Overvalued
Ormat Technologies Stock Shows Every Sign Of Being Modestly Overvalued

To conclude, the stock of Ormat Technologies (NYSE:ORA, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Utilities - Independent Power Producers. To learn more about Ormat Technologies stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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