- By GF Value
The stock of Patrick Industries (NAS:PATK, 30-year Financials) shows every sign of being 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 $82.6 per share and the market cap of $2 billion, Patrick Industries stock is estimated to be modestly overvalued. GF Value for Patrick Industries is shown in the chart below.
Because Patrick Industries is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 17.5% over the past five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Patrick Industries has a cash-to-debt ratio of 0.01, which is in the bottom 10% of the companies in Vehicles & Parts industry. GuruFocus ranks the overall financial strength of Patrick Industries at 4 out of 10, which indicates that the financial strength of Patrick Industries is poor. This is the debt and cash of Patrick Industries over the past years:
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. Patrick Industries has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $2.7 billion and earnings of $5.33 a share. Its operating margin of 7.37% better than 69% of the companies in Vehicles & Parts industry. Overall, GuruFocus ranks Patrick Industries's profitability as strong. This is the revenue and net income of Patrick Industries 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 Patrick Industries is 17.5%, which ranks better than 91% of the companies in Vehicles & Parts industry. The 3-year average EBITDA growth rate is 19.2%, which ranks better than 85% of the companies in Vehicles & Parts 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, Patrick Industries's ROIC is 11.48 while its WACC came in at 12.90. The historical ROIC vs WACC comparison of Patrick Industries is shown below:
In short, the stock of Patrick Industries (NAS:PATK, 30-year Financials) is believed to be modestly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks better than 85% of the companies in Vehicles & Parts industry. To learn more about Patrick Industries stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.