Eagle Materials Stock Shows Every Sign Of Being Modestly Overvalued
- By GF Value
The stock of Eagle Materials (NYSE:EXP, 30-year Financials) appears to be 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 $133.515 per share and the market cap of $5.6 billion, Eagle Materials stock is estimated to be modestly overvalued. GF Value for Eagle Materials is shown in the chart below.
Because Eagle Materials is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 11.1% over the past 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. Eagle Materials has a cash-to-debt ratio of 0.14, which is worse than 79% of the companies in Building Materials industry. The overall financial strength of Eagle Materials is 5 out of 10, which indicates that the financial strength of Eagle Materials is fair. This is the debt and cash of Eagle Materials over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Eagle Materials has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.6 billion and earnings of $8.3 a share. Its operating margin is 20.28%, which ranks better than 81% of the companies in Building Materials industry. Overall, GuruFocus ranks the profitability of Eagle Materials at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Eagle Materials 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 Eagle Materials is 11.1%, which ranks better than 76% of the companies in Building Materials industry. The 3-year average EBITDA growth is -18.1%, which ranks worse than 84% of the companies in Building Materials industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Eagle Materials's ROIC was 13.61, while its WACC came in at 8.22. The historical ROIC vs WACC comparison of Eagle Materials is shown below:
In short, The stock of Eagle Materials (NYSE:EXP, 30-year Financials) shows every sign of being modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 84% of the companies in Building Materials industry. To learn more about Eagle Materials stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
