– By GF Value
The stock of Steelcase (NYSE:SCS, 30-year Financials) gives every indication of being 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 $14.47 per share and the market cap of $1.7 billion, Steelcase stock is estimated to be modestly overvalued. GF Value for Steelcase is shown in the chart below.
Because Steelcase is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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. Steelcase has a cash-to-debt ratio of 0.67, which is in the middle range of the companies in Industrial Products industry. The overall financial strength of Steelcase is 5 out of 10, which indicates that the financial strength of Steelcase is fair. This is the debt and cash of Steelcase over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Steelcase has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.6 billion and earnings of $0.22 a share. Its operating margin is 3.44%, which ranks in the middle range of the companies in Industrial Products industry. Overall, the profitability of Steelcase is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Steelcase over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Steelcase is -5.5%, which ranks worse than 78% of the companies in Industrial Products industry. The 3-year average EBITDA growth rate is -17.5%, which ranks worse than 86% of the companies in Industrial 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, Steelcase’s ROIC is 5.50 while its WACC came in at 8.26. The historical ROIC vs WACC comparison of Steelcase is shown below:
In summary, Steelcase (NYSE:SCS, 30-year Financials) stock appears to be modestly overvalued. The company’s financial condition is fair and its profitability is fair. Its growth ranks worse than 86% of the companies in Industrial Products industry. To learn more about Steelcase 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.