South Jersey Industries Stock Gives Every Indication Of Being Modestly Undervalued

GuruFocus.com
·4 min read

- By GF Value

The stock of South Jersey Industries (NYSE:SJI, 30-year Financials) shows every sign of being 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 $22.56 per share and the market cap of $2.3 billion, South Jersey Industries stock gives every indication of being modestly undervalued. GF Value for South Jersey Industries is shown in the chart below.


South Jersey Industries Stock Gives Every Indication Of Being Modestly Undervalued
South Jersey Industries Stock Gives Every Indication Of Being Modestly Undervalued

Because South Jersey Industries is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 0.6% over the past three years and is estimated to grow 1.22% 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. South Jersey Industries has a cash-to-debt ratio of 0.01, which is in the bottom 10% of the companies in the industry of Utilities - Regulated. The overall financial strength of South Jersey Industries is 3 out of 10, which indicates that the financial strength of South Jersey Industries is poor. This is the debt and cash of South Jersey Industries over the past years:

South Jersey Industries Stock Gives Every Indication Of Being Modestly Undervalued
South Jersey Industries Stock Gives Every Indication Of Being Modestly Undervalued

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. South Jersey Industries has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $1.5 billion and earnings of $1.66 a share. Its operating margin is 18.14%, which ranks in the middle range of the companies in the industry of Utilities - Regulated. Overall, the profitability of South Jersey Industries is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of South Jersey Industries over the past years:

South Jersey Industries Stock Gives Every Indication Of Being Modestly Undervalued
South Jersey Industries Stock Gives Every Indication Of Being Modestly Undervalued

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 South Jersey Industries is 0.6%, which ranks worse than 67% of the companies in the industry of Utilities - Regulated. The 3-year average EBITDA growth is 38.1%, which ranks better than 92% of the companies in the industry of Utilities - Regulated.

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, South Jersey Industries's return on invested capital is 3.49, and its cost of capital is 4.47. The historical ROIC vs WACC comparison of South Jersey Industries is shown below:

South Jersey Industries Stock Gives Every Indication Of Being Modestly Undervalued
South Jersey Industries Stock Gives Every Indication Of Being Modestly Undervalued

In closing, the stock of South Jersey Industries (NYSE:SJI, 30-year Financials)is believed to be modestly undervalued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 92% of the companies in the industry of Utilities - Regulated. To learn more about South Jersey Industries 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.