Service International Stock Shows Every Sign Of Being Modestly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Service International (NYSE:SCI, 30-year Financials) gives every indication of being 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 $56.71 per share and the market cap of $9.6 billion, Service International stock is estimated to be modestly overvalued. GF Value for Service International is shown in the chart below.


Service International Stock Shows Every Sign Of Being Modestly Overvalued
Service International Stock Shows Every Sign Of Being Modestly Overvalued

Because Service International is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 6.8% over the past five years.

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

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. Service International has a cash-to-debt ratio of 0.06, which is in the bottom 10% of the companies in Personal Services industry. The overall financial strength of Service International is 3 out of 10, which indicates that the financial strength of Service International is poor. This is the debt and cash of Service International over the past years:

Service International Stock Shows Every Sign Of Being Modestly Overvalued
Service International Stock Shows Every Sign Of Being Modestly Overvalued

Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Service International has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $3.5 billion and earnings of $2.9 a share. Its operating margin is 23.80%, which ranks better than 88% of the companies in Personal Services industry. Overall, the profitability of Service International is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Service International over the past years:

Service International Stock Shows Every Sign Of Being Modestly Overvalued
Service International Stock Shows Every Sign Of Being 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. Service International's 3-year average revenue growth rate is better than 71% of the companies in Personal Services industry. Service International's 3-year average EBITDA growth rate is 12.8%, which ranks better than 67% of the companies in Personal 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, Service International's ROIC was 4.85, while its WACC came in at 4.72. The historical ROIC vs WACC comparison of Service International is shown below:

Service International Stock Shows Every Sign Of Being Modestly Overvalued
Service International Stock Shows Every Sign Of Being Modestly Overvalued

In summary, The stock of Service International (NYSE:SCI, 30-year Financials) is believed to be modestly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks better than 67% of the companies in Personal Services industry. To learn more about Service International 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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