- By GF Value
The stock of Lundin Mining (OTCPK:LUNMF, 30-year Financials) is believed 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 $11.83549 per share and the market cap of $8.8 billion, Lundin Mining stock appears to be significantly overvalued. GF Value for Lundin Mining is shown in the chart below.
Because Lundin Mining is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 11.25% annually over the next three to five years.
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. Lundin Mining has a cash-to-debt ratio of 0.97, which is worse than 72% of the companies in Metals & Mining industry. GuruFocus ranks the overall financial strength of Lundin Mining at 7 out of 10, which indicates that the financial strength of Lundin Mining is fair. This is the debt and cash of Lundin Mining 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. Lundin Mining has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $2.3 billion and earnings of $0.556 a share. Its operating margin of 28.78% better than 84% of the companies in Metals & Mining industry. Overall, GuruFocus ranks Lundin Mining's profitability as fair. This is the revenue and net income of Lundin Mining over the past years:
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. Lundin Mining's 3-year average revenue growth rate is in the middle range of the companies in Metals & Mining industry. Lundin Mining's 3-year average EBITDA growth rate is -9.9%, which ranks worse than 73% of the companies in Metals & Mining 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, Lundin Mining's ROIC is 7.86 while its WACC came in at 11.55. The historical ROIC vs WACC comparison of Lundin Mining is shown below:
In conclusion, The stock of Lundin Mining (OTCPK:LUNMF, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 73% of the companies in Metals & Mining industry. To learn more about Lundin Mining stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.