- By GF Value
The stock of Prestige Consumer Healthcare (NYSE:PBH, 30-year Financials) appears 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 $48.5 per share and the market cap of $2.4 billion, Prestige Consumer Healthcare stock gives every indication of being significantly overvalued. GF Value for Prestige Consumer Healthcare is shown in the chart below.
Because Prestige Consumer Healthcare is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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. Prestige Consumer Healthcare has a cash-to-debt ratio of 0.02, which is in the bottom 10% of the companies in Medical Distribution industry. GuruFocus ranks the overall financial strength of Prestige Consumer Healthcare at 4 out of 10, which indicates that the financial strength of Prestige Consumer Healthcare is poor. This is the debt and cash of Prestige Consumer Healthcare 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. Prestige Consumer Healthcare has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $943.4 million and earnings of $3.25 a share. Its operating margin of 31.53% better than 97% of the companies in Medical Distribution industry. Overall, GuruFocus ranks Prestige Consumer Healthcare's profitability as fair. This is the revenue and net income of Prestige Consumer Healthcare 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. Prestige Consumer Healthcare's 3-year average revenue growth rate is worse than 74% of the companies in Medical Distribution industry. Prestige Consumer Healthcare's 3-year average EBITDA growth rate is 10.7%, which ranks in the middle range of the companies in Medical Distribution 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, Prestige Consumer Healthcare's return on invested capital is 7.29, and its cost of capital is 4.69. The historical ROIC vs WACC comparison of Prestige Consumer Healthcare is shown below:
In short, the stock of Prestige Consumer Healthcare (NYSE:PBH, 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 Medical Distribution industry. To learn more about Prestige Consumer Healthcare stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.