Albemarle Stock Is Estimated To Be Significantly Overvalued
- By GF Value
The stock of Albemarle (NYSE:ALB, 30-year Financials) is estimated to be significantly 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 $173.54 per share and the market cap of $20.3 billion, Albemarle stock shows every sign of being significantly overvalued. GF Value for Albemarle is shown in the chart below.
Because Albemarle is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 2.3% over the past three years and is estimated to grow 2.41% 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. Albemarle has a cash-to-debt ratio of 0.28, which is worse than 75% of the companies in Chemicals industry. The overall financial strength of Albemarle is 5 out of 10, which indicates that the financial strength of Albemarle is fair. This is the debt and cash of Albemarle over the past years:
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. Albemarle has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $3.2 billion and earnings of $3.35 a share. Its operating margin of 16.70% better than 80% of the companies in Chemicals industry. Overall, GuruFocus ranks Albemarle's profitability as fair. This is the revenue and net income of Albemarle over the past years:
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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Albemarle is 2.3%, which ranks in the middle range of the companies in Chemicals industry. The 3-year average EBITDA growth rate is -2%, which ranks in the middle range of the companies in Chemicals 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, Albemarle's ROIC was 5.28, while its WACC came in at 9.86. The historical ROIC vs WACC comparison of Albemarle is shown below:
In closing, the stock of Albemarle (NYSE:ALB, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Chemicals industry. To learn more about Albemarle stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
