The stock of DXC Technology Co (NYSE:DXC) experienced a daily loss of -2.2%, with a 3-month loss of -25.31%. The company reported a Loss Per Share of 2.84. Given these figures, the question arises: is DXC Technology Co stock modestly undervalued?
This article presents a detailed valuation analysis of DXC Technology Co, providing insights into the company's business operations and comparing its stock price with the fair value estimated by our proprietary GF Value. Let's delve into the intrinsic value of DXC Technology Co.
DXC Technology Co is a vendor-independent IT services provider with two operating segments: Global Business Services (GBS) and Global Infrastructure Services (GIS). The company generates most of its revenue from the GIS segment, which includes Cloud and Security, IT Outsourcing, and Modern Workplace offerings. A majority of the company's revenue comes from the Other Europe region.
The company's market cap stands at $4.20 billion, with a sales figure of $14.20 billion. Despite its current price of $20.24 per share, the GF Value estimates the fair value to be $28.41, suggesting that DXC Technology Co's stock is modestly undervalued.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line provides a snapshot of the fair trading value of the stock.
If the stock price is significantly above the GF Value Line, it indicates overvaluation and the likelihood of poor future returns. Conversely, if the price is significantly below the GF Value Line, the stock may be undervalued, suggesting higher future returns. Currently, DXC Technology Co's stock, priced at $20.24 per share, is considered modestly undervalued.
Given this undervaluation, the long-term return of DXC Technology Co's stock is likely to exceed its business growth.
Investing in companies with poor financial strength exposes investors to a high risk of permanent capital loss. Thus, it's crucial to review a company's financial strength before purchasing shares. Key indicators of financial strength include the cash-to-debt ratio and interest coverage. DXC Technology Co has a cash-to-debt ratio of 0.29, ranking worse than 82.18% of 2755 companies in the Software industry. Overall, DXC Technology Co's financial strength is rated 5 out of 10, indicating fair financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent long-term profitability, is generally less risky. DXC Technology Co has been profitable for 5 out of the past 10 years. In the past twelve months, the company reported a revenue of $14.20 billion and a Loss Per Share of $2.84. Its operating margin of 2.17% ranks worse than 50.86% of 2747 companies in the Software industry. Overall, DXC Technology Co's profitability is rated 5 out of 10, indicating fair profitability.
Growth is a critical factor in a company's valuation. GuruFocus research has found that growth is closely correlated with the long-term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. However, the 3-year average annual revenue growth rate of DXC Technology Co is -5.9%, which ranks worse than 79.36% of 2413 companies in the Software industry. The 3-year average EBITDA growth rate is 0%, ranking worse than 0% of 2008 companies in the Software industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) is another way to evaluate its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, the company is creating value for shareholders. Over the past 12 months, DXC Technology Co's ROIC was 1.61, while its WACC came in at 6.17.
In conclusion, DXC Technology Co (NYSE:DXC) stock appears to be modestly undervalued. The company's financial condition and profitability are fair, but its growth ranks worse than 0% of 2008 companies in the Software industry. To learn more about DXC Technology Co stock, check out its 30-Year Financials here.
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This article first appeared on GuruFocus.