The stock of M/I Homes (NYSE:MHO, 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 $67.31 per share and the market cap of $2 billion, M/I Homes stock gives every indication of being significantly overvalued. GF Value for M/I Homes is shown in the chart below.
Because M/I Homes is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 17.8% 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. M/I Homes has a cash-to-debt ratio of 0.34, which is in the middle range of the companies in Homebuilding & Construction industry. The overall financial strength of M/I Homes is 6 out of 10, which indicates that the financial strength of M/I Homes is fair. This is the debt and cash of M/I Homes 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. M/I Homes has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $3.3 billion and earnings of $9.96 a share. Its operating margin is 11.92%, which ranks better than 67% of the companies in Homebuilding & Construction industry. Overall, the profitability of M/I Homes is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of M/I Homes 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 M/I Homes is 17.8%, which ranks better than 84% of the companies in Homebuilding & Construction industry. The 3-year average EBITDA growth rate is 33%, which ranks better than 87% of the companies in Homebuilding & Construction 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, M/I Homes's return on invested capital is 14.40, and its cost of capital is 10.77. The historical ROIC vs WACC comparison of M/I Homes is shown below:
To conclude, The stock of M/I Homes (NYSE:MHO, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 87% of the companies in Homebuilding & Construction industry. To learn more about M/I Homes stock, you can check out its 30-year Financials here.
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