The stock of Stepan Co (NYSE:SCL, 30-year Financials) gives every indication of being modestly 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 $121.9 per share and the market cap of $2.7 billion, Stepan Co stock is believed to be modestly overvalued. GF Value for Stepan Co is shown in the chart below.
Because Stepan Co is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which is estimated to grow 2.84% annually over the next three to five years.
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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. Stepan Co has a cash-to-debt ratio of 0.49, which ranks in the middle range of the companies in Chemicals industry. Based on this, GuruFocus ranks Stepan Co’s financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Stepan Co 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. Stepan Co 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 $6.01 a share. Its operating margin is 9.50%, which ranks in the middle range of the companies in Chemicals industry. Overall, the profitability of Stepan Co is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Stepan Co 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. Stepan Co’s 3-year average revenue growth rate is in the middle range of the companies in Chemicals industry. Stepan Co’s 3-year average EBITDA growth rate is 3%, which ranks in the middle range 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, Stepan Co’s return on invested capital is 13.22, and its cost of capital is 5.70. The historical ROIC vs WACC comparison of Stepan Co is shown below:
In summary, The stock of Stepan Co (NYSE:SCL, 30-year Financials) gives every indication of being modestly 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 Stepan Co stock, you can check out its 30-year Financials here.
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