Yahoo Finance Hallmark Financial Services Stock Is Believed To Be Possible Value Trap
- By GF Value
The stock of Hallmark Financial Services (NAS:HALL, 30-year Financials) is believed to be possible value trap, 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 $3.89 per share and the market cap of $70.6 million, Hallmark Financial Services stock shows every sign of being possible value trap. GF Value for Hallmark Financial Services is shown in the chart below.
The reason we think that Hallmark Financial Services stock might be a value trap is because its Piotroski F-score is only 2, out of the total of 9. Such a low Piotroski F-score indicates the company is getting worse in multiple aspects in the areas of profitability, funding and efficiency. In this case, investors should look beyond the low valuation of the company and make sure it has no long-term risks. To learn more about how the Piotroski F-score measures the business trend of a company, please go here.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Hallmark Financial Services has a cash-to-debt ratio of 0.98, which ranks worse than 67% of the companies in Insurance industry. Based on this, GuruFocus ranks Hallmark Financial Services's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Hallmark Financial Services over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Hallmark Financial Services has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $478.7 million and loss of $5.05 a share. Its operating margin is 0.00%, which ranks in the bottom 10% of the companies in Insurance industry. Overall, GuruFocus ranks the profitability of Hallmark Financial Services at 4 out of 10, which indicates poor profitability. This is the revenue and net income of Hallmark Financial Services 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 Hallmark Financial Services is 7.9%, which ranks in the middle range of the companies in Insurance industry. The 3-year average EBITDA growth is -142.2%, which ranks in the bottom 10% of the companies in Insurance industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Hallmark Financial Services's return on invested capital is -6.92, and its cost of capital is 6.57. The historical ROIC vs WACC comparison of Hallmark Financial Services is shown below:
In summary, the stock of Hallmark Financial Services (NAS:HALL, 30-year Financials) shows every sign of being possible value trap. The company's financial condition is poor and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Insurance industry. To learn more about Hallmark Financial Services stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
