Heritage Insurance Holdings Stock Is Estimated To Be Significantly Undervalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Heritage Insurance Holdings (NYSE:HRTG, 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 $10.21 per share and the market cap of $285.5 million, Heritage Insurance Holdings stock is estimated to be significantly undervalued. GF Value for Heritage Insurance Holdings is shown in the chart below.


Heritage Insurance Holdings Stock Is Estimated To Be Significantly Undervalued
Heritage Insurance Holdings Stock Is Estimated To Be Significantly Undervalued

Because Heritage Insurance Holdings is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth, which averaged 11.8% over the past five years.

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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. Heritage Insurance Holdings has a cash-to-debt ratio of 3.41, which which ranks in the middle range of the companies in Insurance industry. The overall financial strength of Heritage Insurance Holdings is 5 out of 10, which indicates that the financial strength of Heritage Insurance Holdings is fair. This is the debt and cash of Heritage Insurance Holdings over the past years:

Heritage Insurance Holdings Stock Is Estimated To Be Significantly Undervalued
Heritage Insurance Holdings Stock Is Estimated To Be Significantly Undervalued

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. Heritage Insurance Holdings has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $593.4 million and earnings of $0.33 a share. Its operating margin of 0.00% in the bottom 10% of the companies in Insurance industry. Overall, GuruFocus ranks Heritage Insurance Holdings's profitability as fair. This is the revenue and net income of Heritage Insurance Holdings over the past years:

Heritage Insurance Holdings Stock Is Estimated To Be Significantly Undervalued
Heritage Insurance Holdings Stock Is Estimated To Be Significantly 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 Heritage Insurance Holdings is 11.8%, which ranks better than 78% of the companies in Insurance industry. The 3-year average EBITDA growth is 5.1%, which ranks in the middle range of the companies in Insurance 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, Heritage Insurance Holdings's return on invested capital is 2.92, and its cost of capital is 8.37. The historical ROIC vs WACC comparison of Heritage Insurance Holdings is shown below:

Heritage Insurance Holdings Stock Is Estimated To Be Significantly Undervalued
Heritage Insurance Holdings Stock Is Estimated To Be Significantly Undervalued

In closing, Heritage Insurance Holdings (NYSE:HRTG, 30-year Financials) stock gives every indication of being significantly undervalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Insurance industry. To learn more about Heritage Insurance Holdings stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.