The stock of NewMarket (NYSE:NEU, 30-year Financials) shows every sign of being modestly undervalued, 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 $344.42 per share and the market cap of $3.8 billion, NewMarket stock shows every sign of being modestly undervalued. GF Value for NewMarket is shown in the chart below.
Because NewMarket is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
Link: These companies may deliever higher future returns at reduced risk.
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. NewMarket has a cash-to-debt ratio of 0.50, which is in the middle range of the companies in Chemicals industry. GuruFocus ranks the overall financial strength of NewMarket at 5 out of 10, which indicates that the financial strength of NewMarket is fair. This is the debt and cash of NewMarket 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. NewMarket has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2 billion and earnings of $23.32 a share. Its operating margin is 14.40%, which ranks better than 74% of the companies in Chemicals industry. Overall, the profitability of NewMarket is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of NewMarket 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 NewMarket is -0.4%, which ranks in the middle range of the companies in Chemicals industry. The 3-year average EBITDA growth rate is 6.7%, which ranks in the middle range of the companies in Chemicals industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, NewMarket's return on invested capital is 15.81, and its cost of capital is 3.52.
In conclusion, the stock of NewMarket (NYSE:NEU, 30-year Financials) shows every sign of being modestly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Chemicals industry. To learn more about NewMarket stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
