Stamps.com Stock Is Estimated To Be Fairly Valued
- By GF Value
The stock of Stamps.com (NAS:STMP, 30-year Financials) appears to be fairly valued, 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 $192.66 per share and the market cap of $3.5 billion, Stamps.com stock appears to be fairly valued. GF Value for Stamps.com is shown in the chart below.
Because Stamps.com is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 16% over the past five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Stamps.com has a cash-to-debt ratio of 9.48, which is in the middle range of the companies in Software industry. GuruFocus ranks the overall financial strength of Stamps.com at 8 out of 10, which indicates that the financial strength of Stamps.com is strong. This is the debt and cash of Stamps.com 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. Stamps.com has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $795.7 million and earnings of $10.13 a share. Its operating margin is 27.43%, which ranks better than 94% of the companies in Software industry. Overall, the profitability of Stamps.com is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Stamps.com 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 Stamps.com is 16%, which ranks better than 75% of the companies in Software industry. The 3-year average EBITDA growth is 5.2%, which ranks in the middle range of the companies in Software 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, Stamps.com's return on invested capital is 25.94, and its cost of capital is 4.09. The historical ROIC vs WACC comparison of Stamps.com is shown below:
In closing, the stock of Stamps.com (NAS:STMP, 30-year Financials) is estimated to be fairly valued. The company's financial condition is strong and its profitability is strong. Its growth ranks in the middle range of the companies in Software industry. To learn more about Stamps.com stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
