- By GF Value
The stock of MoneyGram International (NAS:MGI, 30-year Financials) is believed to be significantly 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 $7 per share and the market cap of $549.3 million, MoneyGram International stock is estimated to be significantly overvalued. GF Value for MoneyGram International is shown in the chart below.
Because MoneyGram International is significantly overvalued, the long-term return of its stock is likely to be much lower than its future 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. MoneyGram International has a cash-to-debt ratio of 3.35, which is better than 74% of the companies in Credit Services industry. The overall financial strength of MoneyGram International is 4 out of 10, which indicates that the financial strength of MoneyGram International is poor. This is the debt and cash of MoneyGram International over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. MoneyGram International has been profitable 4 years over the past 10 years. During the past 12 months, the company had revenues of $1.2 billion and loss of $0.14 a share. Its operating margin of 8.46% in the middle range of the companies in Credit Services industry. Overall, GuruFocus ranks MoneyGram International's profitability as poor. This is the revenue and net income of MoneyGram International 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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of MoneyGram International is -15%, which ranks worse than 80% of the companies in Credit Services industry. The 3-year average EBITDA growth rate is 16.3%, which ranks better than 69% of the companies in Credit 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, MoneyGram International's return on invested capital is -9.18, and its cost of capital is 3.46. The historical ROIC vs WACC comparison of MoneyGram International is shown below:
To conclude, the stock of MoneyGram International (NAS:MGI, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 69% of the companies in Credit Services industry. To learn more about MoneyGram International stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.