The stock of Southern Copper (NYSE:SCCO, 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 $69.64 per share and the market cap of $53.8 billion, Southern Copper stock gives every indication of being significantly overvalued. GF Value for Southern Copper is shown in the chart below.
Because Southern Copper is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 6.3% over the past 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. Southern Copper has a cash-to-debt ratio of 0.36, which ranks worse than 82% of the companies in Metals & Mining industry. Based on this, GuruFocus ranks Southern Copper's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Southern Copper over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Southern Copper has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $8.8 billion and earnings of $2.74 a share. Its operating margin of 44.77% better than 94% of the companies in Metals & Mining industry. Overall, GuruFocus ranks Southern Copper's profitability as strong. This is the revenue and net income of Southern Copper 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. Southern Copper's 3-year average revenue growth rate is in the middle range of the companies in Metals & Mining industry. Southern Copper's 3-year average EBITDA growth rate is 5.8%, which ranks in the middle range of the companies in Metals & Mining industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Southern Copper's ROIC was 17.78, while its WACC came in at 8.50. The historical ROIC vs WACC comparison of Southern Copper is shown below:
In short, The stock of Southern Copper (NYSE:SCCO, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Metals & Mining industry. To learn more about Southern Copper stock, you can check out its 30-year Financials here.
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