Unveiling RH (RH)'s Value: Is It Really Priced Right? A Comprehensive Guide
Despite a daily loss of -4.95%, RH (NYSE:RH) has shown an impressive 3-month gain of 38.64%. With an Earnings Per Share (EPS) (EPS) of 14.29, the question arises: is the stock modestly undervalued? This article provides an in-depth valuation analysis of RH (NYSE:RH) to help investors make informed decisions.
A Snapshot of RH (NYSE:RH)
RH (NYSE:RH) operates in the $143 billion domestic furniture and home furnishing industry as a luxury retailer. The company offers a wide range of merchandise including furniture, lighting, textiles, bath, decor, and children's items. RH (NYSE:RH) is also growing its hospitality business, currently with 15 restaurant locations. The company innovates, curates, and integrates products, categories, services, and businesses across channels and brand extensions such as RH Teen, RH Modern, and Waterworks. With a fully integrated store, web, and catalog channels, RH is positioned to broaden its total addressable market over the next decade with its World of RH digital platform. The stock price of RH (NYSE:RH) currently stands at $366.68, with a market cap of $6.70 billion, indicating a potential undervaluation.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value. It is calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line gives an overview of the fair value at which the stock should be traded. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if the price is significantly below the GF Value Line, its future return will likely be higher.
With a GF Value of $405.78, RH (NYSE:RH) appears to be modestly undervalued. Therefore, the long-term return of its stock is likely to be higher than its business growth.
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Assessing RH (NYSE:RH)'s Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent capital loss. Therefore, it's crucial to review a company's financial strength before buying its stock. RH's cash-to-debt ratio of 0.41 is worse than 53.6% of companies in the Retail - Cyclical industry. GuruFocus ranks RH's overall financial strength at 5 out of 10, indicating fair financial strength.
Profitability and Growth of RH (NYSE:RH)
Profitable companies, especially those with consistent profitability over the long term, are less risky investments. A company with high profit margins is generally a safer investment than those with low profit margins. RH has been profitable 9 out of the past 10 years. Over the past twelve months, the company had a revenue of $3.40 billion and an EPS of $14.29. Its operating margin is 18.27%, ranking better than 92.15% of companies in the Retail - Cyclical industry. The overall profitability of RH is ranked 8 out of 10, indicating strong profitability.
One of the most important factors in the valuation of a company is growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of RH is 7.5%, ranking better than 62.9% of companies in the Retail - Cyclical industry. The 3-year average EBITDA growth is 11.9%, ranking better than 58.69% of companies in the same industry.
ROIC vs WACC
Another way to assess the profitability of a company is to compare its return on invested capital (ROIC) and the weighted cost of capital (WACC). The 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. It is preferable for the ROIC to be higher than the WACC. For the past 12 months, RH's ROIC is 14.33, and its WACC is 11.13.
Conclusion
In conclusion, RH (NYSE:RH)'s stock shows every sign of being modestly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 58.69% of 898 companies in the Retail - Cyclical industry. To learn more about RH's stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
