The stock of Atlantic American (NAS:AAME, 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 $4.19 per share and the market cap of $85.5 million, Atlantic American stock shows every sign of being significantly overvalued. GF Value for Atlantic American is shown in the chart below.
Because Atlantic American is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 0.3% over the past five years.
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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. Atlantic American has a cash-to-debt ratio of 0.61, which is worse than 76% of the companies in Insurance industry. The overall financial strength of Atlantic American is 5 out of 10, which indicates that the financial strength of Atlantic American is fair. This is the debt and cash of Atlantic American over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Atlantic American has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $205 million and earnings of $0.9 a share. Its operating margin is 0.00%, which ranks in the bottom 10% of the companies in Insurance industry. Overall, the profitability of Atlantic American is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Atlantic American 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 Atlantic American is 0.3%, which ranks worse than 67% of the companies in Insurance industry. The 3-year average EBITDA growth rate is 25.7%, which ranks better than 86% of the companies in Insurance 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, Atlantic American's return on invested capital is 6.07, and its cost of capital is 3.04. The historical ROIC vs WACC comparison of Atlantic American is shown below:
In short, the stock of Atlantic American (NAS:AAME, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 86% of the companies in Insurance industry. To learn more about Atlantic American stock, you can check out its 30-year Financials here.
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