WestRock Co (WRK, Financial), a prominent player in the packaging industry, recently witnessed a 3.76% gain in its stock price. However, with a Loss Per Share of 4.86, the company's financial performance raises a critical question - is the stock a potential value trap? This article delves into WestRock Co's valuation, revealing insightful aspects of its financial health, profitability, and growth prospects. Let's embark on this analytical journey.
Company Overview
WestRock Co, the result of a merger between RockTenn and MeadWestvaco in 2015, is a leading manufacturer of corrugated and consumer packaging. The company's product line includes folding cartons and paperboard, making it the largest North American producer of solid bleached sulfate and the second-largest producer of containerboard. As of July 27, 2023, the company's stock price stands at $33.5, with a market cap of $8.6 billion. The GF Value, an estimation of the stock's fair value, is pegged at $49.6.
Understanding the GF Value
The GF Value is a proprietary measure that calculates a stock's intrinsic value. The GF Value Line denotes the stock's ideal fair trading value, determined by historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. If the stock price lies significantly above the GF Value Line, it is likely overvalued, indicating poor future returns. Conversely, if the price is significantly below the GF Value Line, the stock may be undervalued, suggesting higher future returns.
According to the GF Value, WestRock Co is potentially a value trap, warranting caution. At its current price of $33.5 per share, the stock's market cap is $8.6 billion. The GF Value suggests that the stock may be overvalued or undervalued based on historical multiples, the company's past business growth, and analyst estimates of future business performance.
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Assessing Financial Strength
Investing in companies with weak financial strength could lead to high risks of permanent capital loss. To mitigate this risk, it's crucial to review a company's financial strength before purchasing shares. WestRock Co's cash-to-debt ratio of 0.04 ranks lower than 87.9% of companies in the Packaging & Containers industry, indicating poor financial strength.
Profitability and Growth
Investing in profitable companies, especially those demonstrating consistent profitability over the long term, poses less risk. WestRock Co, with an operating margin of 7.55%, ranks better than 63.56% of companies in the industry. However, with an average annual revenue growth of 4.8%, the company lags behind 60.4% of companies in the industry. The 3-year average EBITDA growth is -1%, which also ranks lower than most companies in the industry.
ROIC vs WACC
A company's profitability can also be evaluated by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If ROIC exceeds WACC, the company is likely creating value for its shareholders. WestRock Co's ROIC for the past 12 months is 6.57, while its WACC is 6.84.
Potential Value Trap
Despite WestRock Co's seemingly undervalued status, there are signs indicating potential risks. The company's Altman Z-score stands at 1.05, placing it in the distress zone with an increased bankruptcy risk. Ideally, a Z-score above 2.99 indicates a safer financial position. The Z-score, particularly relevant for manufacturing companies, considers factors like profitability, leverage, liquidity, solvency, and activity ratios. To understand the Z-score's role in assessing financial risk, please click here.
Conclusion
In conclusion, WestRock Co's stock appears to be a potential value trap. The company's financial condition is poor, and its profitability is fair. Its growth ranks lower than 64.95% of companies in the Packaging & Containers industry. To learn more about WestRock Co stock, you can check out its 30-Year Financials here.
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