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Quad/Graphics Stock Gives Every Indication Of Being Possible Value Trap

- By GF Value

The stock of Quad/Graphics (NYSE:QUAD, 30-year Financials) gives every indication of being possible value trap, 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 $3.8 per share and the market cap of $209.8 million, Quad/Graphics stock appears to be possible value trap. GF Value for Quad/Graphics is shown in the chart below.


Quad/Graphics Stock Gives Every Indication Of Being Possible Value Trap
Quad/Graphics Stock Gives Every Indication Of Being Possible Value Trap

The reason we think that Quad/Graphics stock might be a value trap is because Quad/Graphics has an Altman Z-score of 1.11, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the company, please go here.

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

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. Quad/Graphics has a cash-to-debt ratio of 0.06, which is in the bottom 10% of the companies in Business Services industry. The overall financial strength of Quad/Graphics is 3 out of 10, which indicates that the financial strength of Quad/Graphics is poor. This is the debt and cash of Quad/Graphics over the past years:

Quad/Graphics Stock Gives Every Indication Of Being Possible Value Trap
Quad/Graphics Stock Gives Every Indication Of Being Possible Value Trap

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. Quad/Graphics has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $2.9 billion and loss of $2.53 a share. Its operating margin is 2.67%, which ranks in the middle range of the companies in Business Services industry. Overall, the profitability of Quad/Graphics is ranked 4 out of 10, which indicates poor profitability. This is the revenue and net income of Quad/Graphics over the past years:

Quad/Graphics Stock Gives Every Indication Of Being Possible Value Trap
Quad/Graphics Stock Gives Every Indication Of Being Possible Value Trap

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. Quad/Graphics's 3-year average revenue growth rate is worse than 80% of the companies in Business Services industry. Quad/Graphics's 3-year average EBITDA growth rate is -29%, which ranks worse than 89% of the companies in Business Services 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, Quad/Graphics's return on invested capital is 4.53, and its cost of capital is 6.92. The historical ROIC vs WACC comparison of Quad/Graphics is shown below:

Quad/Graphics Stock Gives Every Indication Of Being Possible Value Trap
Quad/Graphics Stock Gives Every Indication Of Being Possible Value Trap

In summary, The stock of Quad/Graphics (NYSE:QUAD, 30-year Financials) gives every indication of being possible value trap. The company's financial condition is poor and its profitability is poor. Its growth ranks worse than 89% of the companies in Business Services industry. To learn more about Quad/Graphics 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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