The stock of Sensient Technologies (NYSE:SXT, 30-year Financials) gives every indication of being 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 $88.93 per share and the market cap of $3.8 billion, Sensient Technologies stock shows every sign of being significantly overvalued. GF Value for Sensient Technologies is shown in the chart below.
Because Sensient Technologies is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 0.6% over the past five years.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Sensient Technologies has a cash-to-debt ratio of 0.05, which which ranks in the bottom 10% of the companies in Chemicals industry. The overall financial strength of Sensient Technologies is 5 out of 10, which indicates that the financial strength of Sensient Technologies is fair. This is the debt and cash of Sensient Technologies 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. Sensient Technologies has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.3 billion and earnings of $2.84 a share. Its operating margin is 12.30%, which ranks better than 66% of the companies in Chemicals industry. Overall, GuruFocus ranks the profitability of Sensient Technologies at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Sensient Technologies 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 performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Sensient Technologies is 0.6%, which ranks in the middle range of the companies in Chemicals industry. The 3-year average EBITDA growth rate is -0.9%, 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, Sensient Technologies’s ROIC was 8.71, while its WACC came in at 6.76. The historical ROIC vs WACC comparison of Sensient Technologies is shown below:
In short, the stock of Sensient Technologies (NYSE:SXT, 30-year Financials) gives every indication of being 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 Sensient Technologies stock, you can check out its 30-year Financials here.
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