The stock of SFL (NYSE:SFL, 30-year Financials) appears 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 $7.66 per share and the market cap of $981.4 million, SFL stock gives every indication of being possible value trap. GF Value for SFL is shown in the chart below.
The reason we think that SFL stock might be a value trap is because SFL has an Altman Z-score of 0.10, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the company, please go here.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. SFL has a cash-to-debt ratio of 0.11, which is worse than 79% of the companies in Transportation industry. The overall financial strength of SFL is 3 out of 10, which indicates that the financial strength of SFL is poor. This is the debt and cash of SFL over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. SFL has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $471 million and loss of $2.04 a share. Its operating margin is 40.55%, which ranks better than 96% of the companies in Transportation industry. Overall, the profitability of SFL is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of SFL 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 SFL is 5.3%, which ranks in the middle range of the companies in Transportation industry. The 3-year average EBITDA growth is -64.5%, which ranks in the bottom 10% of the companies in Transportation 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, SFL's ROIC is 5.23 while its WACC came in at 6.01. The historical ROIC vs WACC comparison of SFL is shown below:
In summary, SFL (NYSE:SFL, 30-year Financials) stock shows every sign of being possible value trap. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Transportation industry. To learn more about SFL stock, you can check out its 30-year Financials here.
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