RBC Bearings Stock Gives Every Indication Of Being Modestly Overvalued
- By GF Value
The stock of RBC Bearings (NAS:ROLL, 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 $203.03 per share and the market cap of $5.1 billion, RBC Bearings stock is believed to be modestly overvalued. GF Value for RBC Bearings is shown in the chart below.
Because RBC Bearings is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 4.1% over the past five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. RBC Bearings has a cash-to-debt ratio of 3.49, which is better than 68% of the companies in Industrial Products industry. GuruFocus ranks the overall financial strength of RBC Bearings at 8 out of 10, which indicates that the financial strength of RBC Bearings is strong. This is the debt and cash of RBC Bearings 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. RBC Bearings has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $634.5 million and earnings of $3.94 a share. Its operating margin is 20.43%, which ranks better than 92% of the companies in Industrial Products industry. Overall, GuruFocus ranks the profitability of RBC Bearings at 9 out of 10, which indicates strong profitability. This is the revenue and net income of RBC Bearings 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 RBC Bearings is 4.1%, which ranks in the middle range of the companies in Industrial Products industry. The 3-year average EBITDA growth rate is 8.3%, which ranks in the middle range of the companies in Industrial Products industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, RBC Bearings's return on invested capital is 9.13, and its cost of capital is 9.83. The historical ROIC vs WACC comparison of RBC Bearings is shown below:
In summary, the stock of RBC Bearings (NAS:ROLL, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks in the middle range of the companies in Industrial Products industry. To learn more about RBC Bearings stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
