The Howard Hughes (NYSE: HHC, 30 Financials) stock is showing all signs of significant overvaluation, according to GuruFocus Value’s calculation. The GuruFocus Value is GuruFocus’s estimate of the fair value at which the stock is to trade. It is calculated based on the historical multiples at which the stock has traded, the company’s past growth, and analysts’ estimates of the company’s future performance. If a share’s price is significantly above the GF value line, it is overvalued and its future performance may be poor. On the other hand, if it is significantly below the GF value line, its future return is likely to be higher. At its current price of $ 88.52 per share and market cap of $ 4.9 billion, Howard Hughes’ stock gives all indications of significant overvaluation. The GF value for The Howard Hughes is shown in the table below.
Since The Howard Hughes is significantly overvalued, its long-term stock return is likely to be much lower than its business’s future growth.
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Since investing in companies with poor financial strength could result in a permanent loss of capital, investors should carefully consider the financial strength of a company before deciding whether or not to buy shares. Examining the cash-to-debt ratio and interest coverage can provide a good initial perspective on the financial strength of the business. The Howard Hughes has a cash-to-debt ratio of 0.22, which ranks among the average for real estate companies. Based on this, GuruFocus ranks The Howard Hughes’ financial strength as 2 out of 10, suggesting a poor track record. Here is The Howard Hughes’ debt and money over the past few years:
Investing in profitable businesses carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a business with high profit margins offers better performance potential than a business with low profit margins. The Howard Hughes has been profitable 6 years out of the past 10 years. In the past 12 months, the company achieved sales of $ 714.9 million and earnings of $ 0.58 per share. Its operating margin of -5.49% worse than 78% of companies in the real estate sector. Overall, GuruFocus rates The Howard Hughes’ profitability as fair. Here is The Howard Hughes’ sales and net income for the past few years:
Growth is probably the most important factor in the valuation of a business. GuruFocus research has shown that growth is closely linked to a company’s long-term market performance. A faster growing business creates more shareholder value, especially if the growth is profitable. The Howard Hughes’ 3-year average annual revenue growth is -19.5%, which is worse than 80% of companies in the real estate industry. The average growth rate of EBITDA over 3 years is -2.6%, which is in line with the average for companies in the real estate sector.
A company’s profitability can also be assessed by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on Invested Capital (ROIC) measures the extent to which a business 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 should 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 to create value for its shareholders. Over the past 12 months, Howard Hughes’ ROIC is -0.35 while his WACC is 6.39. The Howard Hughes’ historical ROIC vs WACC comparison is shown below:
In short, the stock of The Howard Hughes (NYSE: HHC, 30-year-old Financials) would be significantly overvalued. The company’s financial situation is bad and its profitability is fair. Its growth is in the mid-range of companies in the real estate industry. To learn more about the Howard Hughes stock, you can view its 30-year financial data here.
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