Telephone and Data Systems Inc (TDS, Financial) experienced a daily loss of 4.29%, yet it has shown a remarkable 3-month gain of 140.84%. Despite reporting a Loss Per Share of 0.85, the question remains: Is the stock fairly valued? This article aims to answer this question by providing an in-depth analysis of the company's valuation. Let's delve into the details.
Company Introduction
Telephone and Data Systems Inc is a diversified telecommunications operator offering mobile, telephone, and broadband services. The company's segments include UScellular and TDS Telecom, with the majority of its revenue generated from the UScellular segment. Currently, the stock is trading at $17.4 per share with a market cap of $2 billion, while the GF Value, an estimation of its fair value, stands at $19.1. This sets the stage for a deeper exploration of the company's value.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It's calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The stock price typically fluctuates around the GF Value Line, which denotes the ideal fair trading value. If the stock price is significantly above the GF Value Line, it's overvalued, and its future return is likely to be poor. Conversely, if it's significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus Value calculation, Telephone and Data Systems (TDS, Financial) appears to be fairly valued. As a result, the long-term return of its stock is likely to be close to the rate of its business growth.
Financial Strength
Assessing the financial strength of a company is crucial before investing in its stock. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are useful indicators of a company's financial strength. Unfortunately, Telephone and Data Systems has a cash-to-debt ratio of 0.05, which is worse than 86.45% of companies in the Telecommunication Services industry. This indicates poor financial strength.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. Telephone and Data Systems has been profitable 9 out of the past 10 years. However, its operating margin of 1.13% ranks worse than 75.91% of companies in the Telecommunication Services industry, indicating fair profitability.
When it comes to growth, Telephone and Data Systems' 3-year average annual revenue growth rate is 2.1%, which ranks worse than 54.5% of companies in the industry. Its 3-year average EBITDA growth rate is -1.5%, ranking worse than 69.46% of companies in the industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) is another way to evaluate its profitability. If the ROIC is higher than the WACC, the company is creating value for shareholders. Over the past 12 months, Telephone and Data Systems's ROIC was 1.08, while its WACC was 4.35.
Conclusion
In conclusion, Telephone and Data Systems (TDS, Financial) appears to be fairly valued. While its financial condition is poor, its profitability is fair. Its growth ranks worse than 69.46% of companies in the Telecommunication Services industry. To learn more about Telephone and Data Systems stock, check out its 30-Year Financials here.
To find high-quality companies that may deliver above-average returns, check out the GuruFocus High Quality Low Capex Screener.
