– By GF Value
The stock of Virtus Investment Partners (NAS:VRTS, 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 $256.81 per share and the market cap of $2 billion, Virtus Investment Partners stock is believed to be significantly overvalued. GF Value for Virtus Investment Partners is shown in the chart below.
Because Virtus Investment Partners is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 8.9% over the past five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Virtus Investment Partners has a cash-to-debt ratio of 0.14, which is worse than 83% of the companies in Asset Management industry. GuruFocus ranks the overall financial strength of Virtus Investment Partners at 3 out of 10, which indicates that the financial strength of Virtus Investment Partners is poor. This is the debt and cash of Virtus Investment Partners 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. Virtus Investment Partners has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $603.2 million and earnings of $9.96 a share. Its operating margin of 23.92% in the middle range of the companies in Asset Management industry. Overall, GuruFocus ranks Virtus Investment Partners’s profitability as strong. This is the revenue and net income of Virtus Investment Partners 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. Virtus Investment Partners’s 3-year average revenue growth rate is better than 71% of the companies in Asset Management industry. Virtus Investment Partners’s 3-year average EBITDA growth rate is 23.1%, which ranks better than 74% of the companies in Asset Management industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Virtus Investment Partners’s ROIC is 3.52 while its WACC came in at 6.87. The historical ROIC vs WACC comparison of Virtus Investment Partners is shown below:
In closing, the stock of Virtus Investment Partners (NAS:VRTS, 30-year Financials) appears to be significantly overvalued. The company’s financial condition is poor and its profitability is strong. Its growth ranks better than 74% of the companies in Asset Management industry. To learn more about Virtus Investment Partners stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.