AAON Stock Appears To Be Modestly Overvalued
- By GF Value
The stock of AAON (NAS:AAON, 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 $64.32 per share and the market cap of $3.4 billion, AAON stock is believed to be modestly overvalued. GF Value for AAON is shown in the chart below.
Because AAON is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 8.3% over the past five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. AAON has a cash-to-debt ratio of 10000.00, which is better than 100% of the companies in Construction industry. GuruFocus ranks the overall financial strength of AAON at 9 out of 10, which indicates that the financial strength of AAON is strong. This is the debt and cash of AAON over the past years:
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. AAON has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $492.9 million and earnings of $1.37 a share. Its operating margin is 17.82%, which ranks better than 90% of the companies in Construction industry. Overall, the profitability of AAON is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of AAON over the past years:
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 AAON is 8.3%, which ranks better than 73% of the companies in Construction industry. The 3-year average EBITDA growth is 11%, which ranks better than 66% of the companies in Construction 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, AAON's return on invested capital is 22.00, and its cost of capital is 5.22. The historical ROIC vs WACC comparison of AAON is shown below:
In closing, the stock of AAON (NAS:AAON, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 66% of the companies in Construction industry. To learn more about AAON stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
