Servotronics Stock Is Believed To Be Modestly Undervalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Servotronics (AMEX:SVT, 30-year Financials) appears to be 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 $7.94 per share and the market cap of $19.7 million, Servotronics stock is estimated to be modestly undervalued. GF Value for Servotronics is shown in the chart below.


Servotronics Stock Is Believed To Be Modestly Undervalued
Servotronics Stock Is Believed To Be Modestly Undervalued

Because Servotronics is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 4.8% 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. Servotronics has a cash-to-debt ratio of 0.60, which which ranks in the middle range of the companies in Industrial Products industry. The overall financial strength of Servotronics is 7 out of 10, which indicates that the financial strength of Servotronics is fair. This is the debt and cash of Servotronics over the past years:

Servotronics Stock Is Believed To Be Modestly Undervalued
Servotronics Stock Is Believed To Be 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. Servotronics has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $49.8 million and earnings of $0.02 a share. Its operating margin is 0.49%, which ranks worse than 74% of the companies in Industrial Products industry. Overall, the profitability of Servotronics is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Servotronics over the past years:

Servotronics Stock Is Believed To Be Modestly Undervalued
Servotronics Stock Is Believed To Be Modestly 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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Servotronics is 4.8%, which ranks in the middle range of the companies in Industrial Products industry. The 3-year average EBITDA growth rate is -19%, which ranks worse than 86% of the companies in Industrial Products industry.

Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Servotronics's return on invested capital is 0.91, and its cost of capital is 6.30. The historical ROIC vs WACC comparison of Servotronics is shown below:

Servotronics Stock Is Believed To Be Modestly Undervalued
Servotronics Stock Is Believed To Be Modestly Undervalued

In closing, the stock of Servotronics (AMEX:SVT, 30-year Financials) gives every indication of being modestly undervalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 86% of the companies in Industrial Products industry. To learn more about Servotronics 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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