WestRock Co (WRK): A Closer Look at Its Modest Undervaluation
WestRock Co (NYSE:WRK) has recently shown a daily gain of 3.1%, and a 3-month gain of 27.46%. However, it reported a Loss Per Share of $5.54. This raises the question: Is the stock modestly undervalued? To answer this, we delve into a detailed analysis of the company's valuation. We invite readers to journey with us as we unravel the financial intricacies of WestRock Co.
Company Overview
WestRock Co, a major player in the packaging industry, specializes in the manufacturing of corrugated and consumer packaging. It emerged as the largest North American producer of solid bleached sulfate and the second-largest producer of containerboard following the merger of RockTenn and MeadWestvaco in 2015. With its stock priced at $36.88 and a market cap of $9.50 billion, it's crucial to compare this with the GF Value, a proprietary measure of the stock's fair value. This comparison will lay the groundwork for an in-depth analysis of the company's valuation.
Understanding the GF Value
The GF Value is a unique valuation method that calculates the intrinsic value of a stock. It considers historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. 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 it is significantly below the GF Value Line, its future return will likely be higher.
WestRock Co (NYSE:WRK), at its current price of $36.88 per share, appears to be modestly undervalued. This is based on the GF Value, which considers historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. Given its modest undervaluation, the long-term return of WestRock Co's stock is likely to be higher than its business growth.
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Assessing Financial Strength
Before investing in a company, it's crucial to evaluate its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are reliable indicators of a company's financial strength. WestRock Co has a cash-to-debt ratio of 0.04, ranking lower than 88.71% of 372 companies in the Packaging & Containers industry. This suggests that WestRock Co's financial strength is relatively weak.
Profitability and Growth
Investing in profitable companies carries less risk. Companies with high profit margins typically offer better performance potential. WestRock Co has been profitable 8 years over the past 10 years. Its operating margin of 6.26% is better than 55.65% of 372 companies in the Packaging & Containers industry. However, the average annual revenue growth of WestRock Co is 4.8%, ranking lower than 61.6% of 362 companies in the same industry. The 3-year average EBITDA growth is -1%, which ranks lower than 64.93% of 345 companies in the industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can provide insight into its profitability. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. WestRock Co's ROIC over the past 12 months is 5.07, while its WACC is 7.26.
Conclusion
In conclusion, WestRock Co (NYSE:WRK) appears to be modestly undervalued. Despite its weak financial condition and fair profitability, it still holds potential for higher long-term returns. To learn more about WestRock Co stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
