Is Steel Connect Inc (STCN) Significantly Overvalued?
Despite a daily loss of 10.44% and an Earnings Per Share (EPS) of 0.84, Steel Connect Inc (NASDAQ:STCN) has seen a 3-month gain of 30.95%. However, the question remains: Is the stock significantly overvalued? This article provides a comprehensive valuation analysis to answer this question. Read on to discover more about Steel Connect's financial health and intrinsic value.
Company Overview
Steel Connect Inc is a diversified holding company with operations in Direct Marketing and Supply Chain. The company generates most of its revenue from the Direct Marketing segment, primarily in the United States. It serves clients in various industries, including consumer electronics, communications, computing, software, storage, and retail. The company's stock price currently stands at $9.89, while the estimated fair value, also known as the GF Value, is $6.8.
Understanding the GF Value
The GF Value is a measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line, visible on our summary page, represents the fair value at which the stock should ideally trade. If the stock price is significantly above the GF Value Line, it is considered overvalued, and its future return is likely to be poor. Conversely, if the stock price is significantly below the GF Value Line, its future return will likely be higher.
Steel Connect (NASDAQ:STCN) stock is estimated to be significantly overvalued based on the GF Value calculation. With a market cap of $61.80 million at its current price of $9.89 per share, the future return of Steel Connect's stock is likely to be much lower than its future business growth due to its overvaluation.
Assessing Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent capital loss. Therefore, it is crucial to review a company's financial strength before deciding to buy its stock. A good starting point is examining the cash-to-debt ratio and interest coverage. Steel Connect has a cash-to-debt ratio of 1.54, better than 54.43% of 983 companies in the Media - Diversified industry. However, GuruFocus ranks Steel Connect's overall financial strength at 4 out of 10, indicating that its financial strength is poor.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. Steel Connect has been profitable 1 over the past 10 years. Over the past twelve months, the company had a revenue of $201.30 million and Earnings Per Share (EPS) of $0.84. Its operating margin is 3.62%, which ranks better than 50.83% of 1021 companies in the Media - Diversified industry. Overall, the profitability of Steel Connect is ranked 3 out of 10, indicating poor profitability.
One crucial factor in a company's valuation is its growth . Companies that grow faster create more value for shareholders, especially if that growth is profitable. However, Steel Connect's average annual revenue growth is -36.8%, ranking worse than 92.5% of 960 companies in the Media - Diversified industry. The 3-year average EBITDA growth is -38.2%, ranking worse than 90.78% of 770 companies in the Media - Diversified industry.
ROIC vs WACC
Return on invested capital (ROIC) and weighted average cost of capital (WACC) are vital indicators of a company's profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The 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, Steel Connect's ROIC is 12.31, and its WACC is 3.24.
Conclusion
In conclusion, Steel Connect (NASDAQ:STCN) stock is estimated to be significantly overvalued. The company's financial condition and profitability are poor, and its growth ranks worse than 90.78% of 770 companies in the Media - Diversified industry. To learn more about Steel Connect stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
