The stock of MagnaChip Semiconductor (NYSE:MX, 30-year Financials) shows every sign of being 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 $23.3 per share and the market cap of $1.1 billion, MagnaChip Semiconductor stock appears to be significantly overvalued. GF Value for MagnaChip Semiconductor is shown in the chart below.
Because MagnaChip Semiconductor 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 6.08% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. MagnaChip Semiconductor has a cash-to-debt ratio of 63.20, which which ranks better than 87% of the companies in Semiconductors industry. The overall financial strength of MagnaChip Semiconductor is 8 out of 10, which indicates that the financial strength of MagnaChip Semiconductor is strong. This is the debt and cash of MagnaChip Semiconductor 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. MagnaChip Semiconductor has been profitable 3 over the past 10 years. Over the past twelve months, the company had a revenue of $509.6 million and earnings of $7.8 a share. Its operating margin is 4.83%, which ranks in the middle range of the companies in Semiconductors industry. Overall, the profitability of MagnaChip Semiconductor is ranked 4 out of 10, which indicates poor profitability. This is the revenue and net income of MagnaChip Semiconductor 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of MagnaChip Semiconductor is -10.5%, which ranks worse than 80% of the companies in Semiconductors industry. The 3-year average EBITDA growth rate is -31.4%, which ranks in the bottom 10% of the companies in Semiconductors industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, MagnaChip Semiconductor's return on invested capital is 19.57, and its cost of capital is 8.66. The historical ROIC vs WACC comparison of MagnaChip Semiconductor is shown below:
Overall, the stock of MagnaChip Semiconductor (NYSE:MX, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is strong and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Semiconductors industry. To learn more about MagnaChip Semiconductor stock, you can check out its 30-year Financials here.
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