- By GF Value
The stock of Teradata (NYSE:TDC, 30-year Financials) appears 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 $40.28 per share and the market cap of $4.4 billion, Teradata stock is estimated to be modestly overvalued. GF Value for Teradata is shown in the chart below.
Because Teradata is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which is estimated to grow 0.31% annually over the next three to five years.
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. Teradata has a cash-to-debt ratio of 0.81, which ranks worse than 73% of the companies in Software industry. Based on this, GuruFocus ranks Teradata's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Teradata 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. Teradata has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $1.8 billion and earnings of $1.14 a share. Its operating margin is 5.44%, which ranks in the middle range of the companies in Software industry. Overall, GuruFocus ranks the profitability of Teradata at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Teradata 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. Teradata's 3-year average revenue growth rate is worse than 70% of the companies in Software industry. Teradata's 3-year average EBITDA growth rate is -2.2%, which ranks worse than 71% of the companies in Software industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Teradata's return on invested capital is 1.24, and its cost of capital is 6.82. The historical ROIC vs WACC comparison of Teradata is shown below:
Overall, the stock of Teradata (NYSE:TDC, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 71% of the companies in Software industry. To learn more about Teradata stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.