Resolute Forest Products Stock Gives Every Indication Of Being Significantly Overvalued
- By GF Value
The stock of Resolute Forest Products (NYSE:RFP, 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 $10.34 per share and the market cap of $835.6 million, Resolute Forest Products stock is believed to be significantly overvalued. GF Value for Resolute Forest Products is shown in the chart below.
Because Resolute Forest Products is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
Link: These companies may deliever higher future returns at reduced risk.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Resolute Forest Products has a cash-to-debt ratio of 0.18, which ranks in the middle range of the companies in Forest Products industry. Based on this, GuruFocus ranks Resolute Forest Products's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Resolute Forest Products 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. Resolute Forest Products has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $2.8 billion and earnings of $0.09 a share. Its operating margin is 5.04%, which ranks in the middle range of the companies in Forest Products industry. Overall, GuruFocus ranks the profitability of Resolute Forest Products at 4 out of 10, which indicates poor profitability. This is the revenue and net income of Resolute Forest Products 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. Resolute Forest Products's 3-year average revenue growth rate is worse than 74% of the companies in Forest Products industry%. Resolute Forest Products's 3-year average EBITDA growth rate is 2.2%, which ranks in the middle range of the companies in Forest Products 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, Resolute Forest Products's return on invested capital is 0.68, and its cost of capital is 7.60. The historical ROIC vs WACC comparison of Resolute Forest Products is shown below:
Overall, Resolute Forest Products (NYSE:RFP, 30-year Financials) stock shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks in the middle range of the companies in Forest Products industry. To learn more about Resolute Forest Products 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.
