- By GF Value
The stock of Lululemon Athletica (NAS:LULU, 30-year Financials) gives every indication of being modestly 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 $335.38 per share and the market cap of $45.5 billion, Lululemon Athletica stock gives every indication of being modestly overvalued. GF Value for Lululemon Athletica is shown in the chart below.
Because Lululemon Athletica is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 21.2% over the past three years and is estimated to grow 15.02% annually over the next three to five years.
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. Lululemon Athletica has a cash-to-debt ratio of 0.62, which is in the middle range of the companies in the industry of Retail - Cyclical. The overall financial strength of Lululemon Athletica is 6 out of 10, which indicates that the financial strength of Lululemon Athletica is fair. This is the debt and cash of Lululemon Athletica over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Lululemon Athletica has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4.1 billion and earnings of $4.26 a share. Its operating margin is 19.62%, which ranks better than 94% of the companies in the industry of Retail - Cyclical. Overall, the profitability of Lululemon Athletica is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Lululemon Athletica 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 Lululemon Athletica is 21.2%, which ranks better than 90% of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth rate is 29.4%, which ranks better than 81% of the companies in the industry of Retail - Cyclical.
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, Lululemon Athletica's return on invested capital is 24.59, and its cost of capital is 10.05. The historical ROIC vs WACC comparison of Lululemon Athletica is shown below:
In closing, The stock of Lululemon Athletica (NAS:LULU, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 81% of the companies in the industry of Retail - Cyclical. To learn more about Lululemon Athletica stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.