Yahoo Finance Extended Stay America Stock Is Estimated To Be Significantly Overvalued
- By GF Value
The stock of Extended Stay America (NAS:STAY, 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 $19.7 per share and the market cap of $3.5 billion, Extended Stay America stock gives every indication of being significantly overvalued. GF Value for Extended Stay America is shown in the chart below.
Because Extended Stay America is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
Link: These companies may deliever higher future returns at reduced risk.
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. Extended Stay America has a cash-to-debt ratio of 0.15, which is worse than 73% of the companies in Travel & Leisure industry. GuruFocus ranks the overall financial strength of Extended Stay America at 3 out of 10, which indicates that the financial strength of Extended Stay America is poor. This is the debt and cash of Extended Stay America 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. Extended Stay America has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $1 billion and earnings of $0.14 a share. Its operating margin of 14.43% better than 88% of the companies in Travel & Leisure industry. Overall, GuruFocus ranks Extended Stay America's profitability as fair. This is the revenue and net income of Extended Stay America 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 Extended Stay America is -4%, which ranks in the middle range of the companies in Travel & Leisure industry. The 3-year average EBITDA growth rate is -9.1%, which ranks in the middle range of the companies in Travel & Leisure industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Extended Stay America's ROIC is 5.52 while its WACC came in at 10.10. The historical ROIC vs WACC comparison of Extended Stay America is shown below:
In conclusion, the stock of Extended Stay America (NAS:STAY, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Travel & Leisure industry. To learn more about Extended Stay America 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.
