– By GF Value
The stock of Atlantic American (NAS:AAME, 30-year Financials) appears 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 $3.75 per share and the market cap of $76.6 million, Atlantic American stock is believed to be significantly overvalued. GF Value for Atlantic American is shown in the chart below.
Because Atlantic American is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 0.3% over the past five years.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company’s financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company’s financial strength. Atlantic American has a cash-to-debt ratio of 0.57, which ranks worse than 78% of the companies in Insurance industry. Based on this, GuruFocus ranks Atlantic American’s financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Atlantic American 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. Atlantic American has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $195.3 million and earnings of $0.53 a share. Its operating margin of 0.00% in the bottom 10% of the companies in Insurance industry. Overall, GuruFocus ranks Atlantic American’s profitability as fair. This is the revenue and net income of Atlantic American 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. Atlantic American’s 3-year average revenue growth rate is worse than 69% of the companies in Insurance industry. Atlantic American’s 3-year average EBITDA growth rate is 25.7%, which ranks better than 86% of the companies in Insurance 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, Atlantic American’s ROIC was 3.88, while its WACC came in at 3.06. The historical ROIC vs WACC comparison of Atlantic American is shown below:
In short, The stock of Atlantic American (NAS:AAME, 30-year Financials) is believed to be significantly overvalued. The company’s financial condition is fair and its profitability is fair. Its growth ranks better than 86% of the companies in Insurance industry. To learn more about Atlantic American stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.