Macmahon Holdings Stock Shows Every Sign Of Being Significantly Undervalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Macmahon Holdings (ASX:MAH, 30-year Financials) shows every sign of being significantly 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 AUD 0.195 per share and the market cap of AUD 420.2 million, Macmahon Holdings stock is believed to be significantly undervalued. GF Value for Macmahon Holdings is shown in the chart below.


Macmahon Holdings Stock Shows Every Sign Of Being Significantly Undervalued
Macmahon Holdings Stock Shows Every Sign Of Being Significantly Undervalued

Because Macmahon Holdings is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth, which averaged 28.1% over the past five years.

Link: These companies may deliever higher future returns at reduced risk.

Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Macmahon Holdings has a cash-to-debt ratio of 0.54, which which ranks in the middle range of the companies in Construction industry. The overall financial strength of Macmahon Holdings is 6 out of 10, which indicates that the financial strength of Macmahon Holdings is fair. This is the debt and cash of Macmahon Holdings over the past years:

Macmahon Holdings Stock Shows Every Sign Of Being Significantly Undervalued
Macmahon Holdings Stock Shows Every Sign Of Being Significantly Undervalued

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. Macmahon Holdings has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of AUD 1.3 billion and earnings of AUD 0.038 a share. Its operating margin is 6.09%, which ranks in the middle range of the companies in Construction industry. Overall, GuruFocus ranks the profitability of Macmahon Holdings at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Macmahon Holdings over the past years:

Macmahon Holdings Stock Shows Every Sign Of Being Significantly Undervalued
Macmahon Holdings Stock Shows Every Sign Of Being Significantly Undervalued

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 Macmahon Holdings is 28.1%, which ranks better than 92% of the companies in Construction industry. The 3-year average EBITDA growth rate is 62%, which ranks better than 96% of the companies in Construction 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, Macmahon Holdings's ROIC was 13.04, while its WACC came in at 5.50. The historical ROIC vs WACC comparison of Macmahon Holdings is shown below:

Macmahon Holdings Stock Shows Every Sign Of Being Significantly Undervalued
Macmahon Holdings Stock Shows Every Sign Of Being Significantly Undervalued

In short, the stock of Macmahon Holdings (ASX:MAH, 30-year Financials) is estimated to be significantly undervalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 96% of the companies in Construction industry. To learn more about Macmahon Holdings 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.

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