The stock of Innospec (NAS:IOSP, 30-year Financials) is estimated 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 $100.46 per share and the market cap of $2.5 billion, Innospec stock appears to be significantly overvalued. GF Value for Innospec is shown in the chart below.
Because Innospec is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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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. Innospec has a cash-to-debt ratio of 3.15, which ranks better than 69% of the companies in Chemicals industry. Based on this, GuruFocus ranks Innospec's financial strength as 8 out of 10, suggesting strong balance sheet. This is the debt and cash of Innospec 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. Innospec has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.2 billion and earnings of $1.14 a share. Its operating margin is 5.35%, which ranks in the middle range of the companies in Chemicals industry. Overall, the profitability of Innospec is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Innospec 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. Innospec's 3-year average revenue growth rate is worse than 72% of the companies in Chemicals industry. Innospec's 3-year average EBITDA growth rate is -22.6%, which ranks in the bottom 10% of the companies in Chemicals 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, Innospec's return on invested capital is 4.16, and its cost of capital is 9.70. The historical ROIC vs WACC comparison of Innospec is shown below:
In short, Innospec (NAS:IOSP, 30-year Financials) stock shows every sign of being significantly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Chemicals industry. To learn more about Innospec stock, you can check out its 30-year Financials here.
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