– By GF Value
The stock of Spark Energy (NAS:SPKE, 30-year Financials) gives every indication 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 $10.5 per share and the market cap of $372 million, Spark Energy stock is believed to be significantly overvalued. GF Value for Spark Energy is shown in the chart below.
Because Spark Energy is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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. Spark Energy has a cash-to-debt ratio of 0.72, which which ranks better than 72% of the companies in the industry of Utilities – Regulated. The overall financial strength of Spark Energy is 6 out of 10, which indicates that the financial strength of Spark Energy is fair. This is the debt and cash of Spark Energy over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Spark Energy has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $554.9 million and earnings of $1.47 a share. Its operating margin is 16.00%, which ranks in the middle range of the companies in the industry of Utilities – Regulated. Overall, the profitability of Spark Energy is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Spark Energy 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 Spark Energy is -14.2%, which ranks in the bottom 10% of the companies in the industry of Utilities – Regulated. The 3-year average EBITDA growth rate is -14.1%, which ranks worse than 88% of the companies in the industry of Utilities – Regulated.
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, Spark Energy’s ROIC is 29.45 while its WACC came in at 7.83. The historical ROIC vs WACC comparison of Spark Energy is shown below:
In summary, The stock of Spark Energy (NAS:SPKE, 30-year Financials) shows every sign of being significantly overvalued. The company’s financial condition is fair and its profitability is fair. Its growth ranks worse than 88% of the companies in the industry of Utilities – Regulated. To learn more about Spark Energy stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.