DLH Holdings Stock Is Estimated To Be Modestly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of DLH Holdings (NAS:DLHC, 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 $10.64 per share and the market cap of $133.5 million, DLH Holdings stock gives every indication of being modestly overvalued. GF Value for DLH Holdings is shown in the chart below.


DLH Holdings Stock Is Estimated To Be Modestly Overvalued
DLH Holdings Stock Is Estimated To Be Modestly Overvalued

Because DLH Holdings is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 19.5% over the past three years and is estimated to grow 14.58% 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. DLH Holdings has a cash-to-debt ratio of 0.00, which is in the bottom 10% of the companies in Business Services industry. The overall financial strength of DLH Holdings is 4 out of 10, which indicates that the financial strength of DLH Holdings is poor. This is the debt and cash of DLH Holdings over the past years:

DLH Holdings Stock Is Estimated To Be Modestly Overvalued
DLH Holdings Stock Is Estimated To Be Modestly Overvalued

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. DLH Holdings has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $214.8 million and earnings of $0.55 a share. Its operating margin of 6.94% in the middle range of the companies in Business Services industry. Overall, GuruFocus ranks DLH Holdings's profitability as fair. This is the revenue and net income of DLH Holdings over the past years:

DLH Holdings Stock Is Estimated To Be Modestly Overvalued
DLH Holdings Stock Is Estimated To Be Modestly Overvalued

Growth is probably one of the most important factors 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. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. DLH Holdings's 3-year average revenue growth rate is better than 87% of the companies in Business Services industry. DLH Holdings's 3-year average EBITDA growth rate is 32.5%, which ranks better than 87% of the companies in Business Services 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, DLH Holdings's ROIC was 7.22, while its WACC came in at 6.26. The historical ROIC vs WACC comparison of DLH Holdings is shown below:

DLH Holdings Stock Is Estimated To Be Modestly Overvalued
DLH Holdings Stock Is Estimated To Be Modestly Overvalued

In closing, the stock of DLH Holdings (NAS:DLHC, 30-year Financials) shows every sign of being modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 87% of the companies in Business Services industry. To learn more about DLH Holdings stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.