PennyMac Financial Services Stock Shows Every Sign Of Being Modestly Undervalued
- By GF Value
The stock of PennyMac Financial Services (NYSE:PFSI, 30-year Financials) appears to be modestly 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 $64.45 per share and the market cap of $4.5 billion, PennyMac Financial Services stock is believed to be modestly undervalued. GF Value for PennyMac Financial Services is shown in the chart below.
Because PennyMac Financial Services is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 4.7% over the past three years and is estimated to grow 19.40% annually over the next three to five years.
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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. PennyMac Financial Services has a cash-to-debt ratio of 0.02, which is in the bottom 10% of the companies in Banks industry. The overall financial strength of PennyMac Financial Services is 2 out of 10, which indicates that the financial strength of PennyMac Financial Services is poor. This is the debt and cash of PennyMac Financial Services over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. PennyMac Financial Services has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4 billion and earnings of $21.12 a share. Its operating margin is 57.34%, which ranks better than 79% of the companies in Banks industry. Overall, the profitability of PennyMac Financial Services is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of PennyMac Financial Services over the past years:
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. PennyMac Financial Services's 3-year average revenue growth rate is in the middle range of the companies in Banks industry%. PennyMac Financial Services's 3-year average EBITDA growth rate is 4.4%, which ranks in the middle range of the companies in Banks 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, PennyMac Financial Services's ROIC is 8.46 while its WACC came in at 1.94. The historical ROIC vs WACC comparison of PennyMac Financial Services is shown below:
In closing, the stock of PennyMac Financial Services (NYSE:PFSI, 30-year Financials)is believed to be modestly undervalued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Banks industry. To learn more about PennyMac Financial Services 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.
