The stock of Hallmark Financial Services (NAS:HALL, 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 $3.94 per share and the market cap of $71.5 million, Hallmark Financial Services stock is believed to be possible value trap. GF Value for Hallmark Financial Services is shown in the chart below.
The reason we think that Hallmark Financial Services stock might be a value trap is because its Piotroski F-score is only 2, out of the total of 9. Such a low Piotroski F-score indicates the company is getting worse in multiple aspects in the areas of profitability, funding and efficiency. In this case, investors should look beyond the low valuation of the company and make sure it has no long-term risks. To learn more about how the Piotroski F-score measures the business trend of a 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. Hallmark Financial Services has a cash-to-debt ratio of 0.98, which is worse than 66% of the companies in Insurance industry. The overall financial strength of Hallmark Financial Services is 4 out of 10, which indicates that the financial strength of Hallmark Financial Services is poor. This is the debt and cash of Hallmark Financial Services 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. Hallmark Financial Services has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $478.7 million and loss of $5.05 a share. Its operating margin is 0.00%, which ranks in the bottom 10% of the companies in Insurance industry. Overall, the profitability of Hallmark Financial Services is ranked 4 out of 10, which indicates poor profitability. This is the revenue and net income of Hallmark Financial Services 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 Hallmark Financial Services is 7.9%, which ranks in the middle range of the companies in Insurance industry. The 3-year average EBITDA growth is -142.2%, which ranks in the bottom 10% of the companies in Insurance 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, Hallmark Financial Services's ROIC is -6.92 while its WACC came in at 6.67. The historical ROIC vs WACC comparison of Hallmark Financial Services is shown below:
Overall, the stock of Hallmark Financial Services (NAS:HALL, 30-year Financials) appears to be possible value trap. The company's financial condition is poor and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Insurance industry. To learn more about Hallmark Financial Services stock, you can check out its 30-year Financials here.
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