TELUS Stock Is Believed To Be Fairly Valued

GuruFocus.com
·4 min read

- By GF Value

The stock of TELUS (NYSE:TU, 30-year Financials) is estimated to be fairly valued, 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 $20.23 per share and the market cap of $26.2 billion, TELUS stock shows every sign of being fairly valued. GF Value for TELUS is shown in the chart below.


TELUS Stock Is Believed To Be Fairly Valued
TELUS Stock Is Believed To Be Fairly Valued

Because TELUS is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 2.3% over the past three years and is estimated to grow 5.41% annually over the next three to five years.

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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. TELUS has a cash-to-debt ratio of 0.04, which ranks in the bottom 10% of the companies in Telecommunication Services industry. Based on this, GuruFocus ranks TELUS's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of TELUS over the past years:

TELUS Stock Is Believed To Be Fairly Valued
TELUS Stock Is Believed To Be Fairly Valued

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. TELUS has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $11.5 billion and earnings of $0.708 a share. Its operating margin is 15.49%, which ranks better than 69% of the companies in Telecommunication Services industry. Overall, GuruFocus ranks the profitability of TELUS at 8 out of 10, which indicates strong profitability. This is the revenue and net income of TELUS over the past years:

TELUS Stock Is Believed To Be Fairly Valued
TELUS Stock Is Believed To Be Fairly Valued

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 TELUS is 2.3%, which ranks in the middle range of the companies in Telecommunication Services industry. The 3-year average EBITDA growth is 1%, which ranks in the middle range of the companies in Telecommunication Services 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, TELUS's return on invested capital is 4.56, and its cost of capital is 3.65. The historical ROIC vs WACC comparison of TELUS is shown below:

TELUS Stock Is Believed To Be Fairly Valued
TELUS Stock Is Believed To Be Fairly Valued

In conclusion, The stock of TELUS (NYSE:TU, 30-year Financials) gives every indication of being fairly valued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Telecommunication Services industry. To learn more about TELUS stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.