- By GF Value
The stock of UFP Industries (NAS:UFPI, 30-year Financials) gives every indication of being 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 $83.14 per share and the market cap of $5.1 billion, UFP Industries stock gives every indication of being significantly overvalued. GF Value for UFP Industries is shown in the chart below.
Because UFP Industries is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 9.6% over the past five years.
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. UFP Industries has a cash-to-debt ratio of 0.13, which is worse than 70% of the companies in Forest Products industry. The overall financial strength of UFP Industries is 7 out of 10, which indicates that the financial strength of UFP Industries is fair. This is the debt and cash of UFP Industries 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. UFP Industries has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $5.9 billion and earnings of $5.02 a share. Its operating margin is 7.29%, which ranks in the middle range of the companies in Forest Products industry. Overall, the profitability of UFP Industries is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of UFP Industries 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. UFP Industries's 3-year average revenue growth rate is better than 86% of the companies in Forest Products industry. UFP Industries's 3-year average EBITDA growth rate is 21.8%, which ranks better than 85% of the companies in Forest Products industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, UFP Industries's ROIC is 18.45 while its WACC came in at 10.03. The historical ROIC vs WACC comparison of UFP Industries is shown below:
In summary, The stock of UFP Industries (NAS:UFPI, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 85% of the companies in Forest Products industry. To learn more about UFP Industries 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.