- By GF Value
The stock of Service Properties Trust (NAS:SVC, 30-year Financials) is believed to be significantly 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 $14.18 per share and the market cap of $2.3 billion, Service Properties Trust stock is estimated to be significantly overvalued. GF Value for Service Properties Trust is shown in the chart below.
Because Service Properties Trust is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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. Service Properties Trust has a cash-to-debt ratio of 0.12, which which ranks better than 66% of the companies in REITs industry. The overall financial strength of Service Properties Trust is 2 out of 10, which indicates that the financial strength of Service Properties Trust is poor. This is the debt and cash of Service Properties Trust over the past years:
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. Service Properties Trust has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $1 billion and loss of $2.88 a share. Its operating margin is -15.21%, which ranks in the bottom 10% of the companies in REITs industry. Overall, GuruFocus ranks the profitability of Service Properties Trust at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Service Properties Trust 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 Service Properties Trust is -16.5%, which ranks worse than 88% of the companies in REITs industry. The 3-year average EBITDA growth is -12.6%, which ranks worse than 69% of the companies in REITs industry.
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, Service Properties Trust's return on invested capital is -1.85, and its cost of capital is 8.52. The historical ROIC vs WACC comparison of Service Properties Trust is shown below:
To conclude, Service Properties Trust (NAS:SVC, 30-year Financials) stock appears to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 69% of the companies in REITs industry. To learn more about Service Properties Trust stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.