- By GF Value
The stock of ProPhase Labs (NAS:PRPH, 30-year Financials) is believed 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 $6.83 per share and the market cap of $103.5 million, ProPhase Labs stock appears to be modestly overvalued. GF Value for ProPhase Labs is shown in the chart below.
Because ProPhase Labs is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 51.4% over the past five years.
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. ProPhase Labs has a cash-to-debt ratio of 1.23, which which ranks in the middle range of the companies in Drug Manufacturers industry. The overall financial strength of ProPhase Labs is 5 out of 10, which indicates that the financial strength of ProPhase Labs is fair. This is the debt and cash of ProPhase Labs 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. ProPhase Labs has been profitable 2 years over the past 10 years. During the past 12 months, the company had revenues of $12.5 million and loss of $0.14 a share. Its operating margin of -14.30% worse than 70% of the companies in Drug Manufacturers industry. Overall, GuruFocus ranks ProPhase Labs's profitability as poor. This is the revenue and net income of ProPhase Labs 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 ProPhase Labs is 51.4%, which ranks better than 92% of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth rate is -7.7%, which ranks worse than 70% of the companies in Drug Manufacturers industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, ProPhase Labs's return on invested capital is -20.51, and its cost of capital is 1.32. The historical ROIC vs WACC comparison of ProPhase Labs is shown below:
In conclusion, ProPhase Labs (NAS:PRPH, 30-year Financials) stock shows every sign of being modestly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks worse than 70% of the companies in Drug Manufacturers industry. To learn more about ProPhase Labs 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.