China Mobile Stock Is Believed To Be Modestly Undervalued
- By GF Value
The stock of China Mobile (NYSE:CHL, 30-year Financials) appears to be modestly undervalued, 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 $27.51 per share and the market cap of $112.7 billion, China Mobile stock shows every sign of being modestly undervalued. GF Value for China Mobile is shown in the chart below.
Because China Mobile is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 1.2% over the past three years and is estimated to grow 1.97% annually over the next three to five years.
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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. China Mobile has a cash-to-debt ratio of 6.78, which is better than 86% of the companies in Telecommunication Services industry. The overall financial strength of China Mobile is 7 out of 10, which indicates that the financial strength of China Mobile is fair. This is the debt and cash of China Mobile 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. China Mobile has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $112.9 billion and earnings of $1.92 a share. Its operating margin is 15.53%, which ranks better than 69% of the companies in Telecommunication Services industry. Overall, the profitability of China Mobile is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of China Mobile over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of China Mobile is 1.2%, which ranks in the middle range of the companies in Telecommunication Services industry. The 3-year average EBITDA growth is 2%, which ranks in the middle range of the companies in Telecommunication Services industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, China Mobile's return on invested capital is 7.23, and its cost of capital is 5.27. The historical ROIC vs WACC comparison of China Mobile is shown below:
In conclusion, the stock of China Mobile (NYSE:CHL, 30-year Financials) is estimated to be modestly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Telecommunication Services industry. To learn more about China Mobile stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
