Despite a 27.35% gain over the past three months, M/I Homes Inc (MHO, Financial) experienced an 8.4% loss in the stock market on September 05, 2023. With an Earnings Per Share (EPS) of 17.08, the question arises: is the stock significantly overvalued? This article aims to explore the intrinsic value of M/I Homes Inc (MHO) and provide a comprehensive valuation analysis for potential investors.
Company Overview
M/I Homes Inc is a prominent American construction company that primarily focuses on residential construction. The company operates two distinct segments: homebuilding and financial services. The homebuilding operations span across the Midwest, Mid-Atlantic, and Southern regions, while its financial services provide mortgage loans and title services to support homebuilding operations. M/I Homes targets entry-level, move-up, and luxury homebuyers, catering to a diverse customer base.
At present, M/I Homes (MHO, Financial) trades at $92.32 per share, boasting a market cap of $2.60 billion. However, the stock appears to be significantly overvalued when compared to its fair value (GF Value) of $61.69.
Deciphering GF Value
The GF Value is a proprietary measure that estimates a stock's intrinsic value. It is calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line represents the fair trading value of the stock.
When a stock's price significantly exceeds the GF Value Line, it is considered overvalued, indicating a potentially poor future return. Conversely, if the price is significantly below the GF Value Line, the stock is likely to yield a higher future return. Based on this analysis, M/I Homes (MHO, Financial) appears to be significantly overvalued, which could lead to lower long-term returns despite potential future business growth.
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Financial Strength
Investing in companies with poor financial strength can pose a high risk of permanent capital loss. Therefore, it's essential to assess a company's financial strength before purchasing shares. Key indicators such as the cash-to-debt ratio and interest coverage provide valuable insights into a company's financial health. With a cash-to-debt ratio of 0.71, M/I Homes ranks better than 52.83% of companies in the Homebuilding & Construction industry. The overall financial strength of M/I Homes is 8 out of 10, indicating strong financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent long-term profitability, is generally less risky. M/I Homes has been profitable for 10 years, with an operating margin of 14.97%, ranking better than 70.64% of companies in the Homebuilding & Construction industry. This strong profitability is reflected in its rank of 9 out of 10.
Growth is a critical factor in a company's valuation. M/I Homes's 3-year average revenue growth rate is better than 76.47% of companies in the Homebuilding & Construction industry, and its 3-year average EBITDA growth rate of 48.1% ranks better than 83.16% of companies in the same industry. These figures indicate strong growth.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) with its weighted average cost of capital (WACC) can provide insights into its profitability. The ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The 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. M/I Homes's ROIC is 16.11, and its WACC is 9.68.
Conclusion
In conclusion, the stock of M/I Homes (MHO, Financial) appears to be significantly overvalued. Despite strong financial health and profitability, the stock's current pricing may limit future returns. To learn more about M/I Homes stock, you can check out its 30-Year Financials here.
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