The stock of Insteel Industries (NYSE:IIIN, 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 $34.93 per share and the market cap of $675.6 million, Insteel Industries stock shows every sign of being significantly overvalued. GF Value for Insteel Industries is shown in the chart below.
Because Insteel Industries is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 6.4% over the past five years.
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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. Insteel Industries has a cash-to-debt ratio of 20.06, which is better than 82% of the companies in Industrial Products industry. GuruFocus ranks the overall financial strength of Insteel Industries at 9 out of 10, which indicates that the financial strength of Insteel Industries is strong. This is the debt and cash of Insteel Industries 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. Insteel Industries has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $494.7 million and earnings of $1.37 a share. Its operating margin is 7.12%, which ranks in the middle range of the companies in Industrial Products industry. Overall, the profitability of Insteel Industries is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Insteel Industries 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. Insteel Industries's 3-year average revenue growth rate is in the middle range of the companies in Industrial Products industry. Insteel Industries's 3-year average EBITDA growth rate is -6%, which ranks worse than 69% of the companies in Industrial Products 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, Insteel Industries's ROIC is 12.73 while its WACC came in at 10.81. The historical ROIC vs WACC comparison of Insteel Industries is shown below:
Overall, the stock of Insteel Industries (NYSE:IIIN, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks worse than 69% of the companies in Industrial Products industry. To learn more about Insteel Industries stock, you can check out its 30-year Financials here.
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