RCI Hospitality Holdings Stock Is Estimated To Be Significantly Overvalued
- By GF Value
The stock of RCI Hospitality Holdings (NAS:RICK, 30-year Financials) is believed 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 $76.98 per share and the market cap of $692.8 million, RCI Hospitality Holdings stock appears to be significantly overvalued. GF Value for RCI Hospitality Holdings is shown in the chart below.
Because RCI Hospitality Holdings is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 8.29% annually over the next three to 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. RCI Hospitality Holdings has a cash-to-debt ratio of 0.13, which is worse than 74% of the companies in Restaurants industry. The overall financial strength of RCI Hospitality Holdings is 4 out of 10, which indicates that the financial strength of RCI Hospitality Holdings is poor. This is the debt and cash of RCI Hospitality Holdings over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. RCI Hospitality Holdings has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $126 million and earnings of $0.84 a share. Its operating margin is 12.52%, which ranks better than 89% of the companies in Restaurants industry. Overall, GuruFocus ranks the profitability of RCI Hospitality Holdings at 7 out of 10, which indicates fair profitability. This is the revenue and net income of RCI Hospitality Holdings 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. RCI Hospitality Holdings's 3-year average revenue growth rate is in the middle range of the companies in Restaurants industry. RCI Hospitality Holdings's 3-year average EBITDA growth rate is -25.5%, which ranks worse than 84% of the companies in Restaurants 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, RCI Hospitality Holdings's ROIC was 4.03, while its WACC came in at 13.21. The historical ROIC vs WACC comparison of RCI Hospitality Holdings is shown below:
In short, RCI Hospitality Holdings (NAS:RICK, 30-year Financials) stock shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 84% of the companies in Restaurants industry. To learn more about RCI Hospitality Holdings stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.