Centrais Eletricas Brasileiras SA (EBR, Financial) experienced a daily gain of 4.38% and a 3-month loss of -8.22%. With an Earnings Per Share (EPS) of 0.27, the question arises: is the stock modestly overvalued? This article provides a detailed valuation analysis of Centrais Eletricas Brasileiras SA (EBR). We encourage you to read on to understand the intrinsic value of this stock.
Company Introduction
Centrais Eletricas Brasileiras SA, or Eletrobras, is a Brazilian electric utility company with a mixed capital, majority-owned by the Government of Brazil. Through its subsidiaries, Eletrobras controls a significant portion of Brazil's total installed electricity generation, transmission, and distribution. The company operates a portfolio of wind, thermal, hydro, and nuclear power plants across the country. The majority of Eletrobras' energy is produced from its hydroelectric facilities. The company primarily generates revenue from the administration segment, with about half of Eletrobras' electricity sales made using free market agreements, while the other half is completed through auctions and contracts.
The current stock price of Centrais Eletricas Brasileiras SA (EBR, Financial) is $7.52, while its GF Value, an estimation of fair value, stands at $6.64. This comparison suggests that the stock is modestly overvalued. To understand this valuation better, let's delve deeper into the company's financial performance and projections.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock, derived from our unique method. The GF Value Line provides an overview of the fair value at which the stock should be traded. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
The GF Value Line is the fair value at which the stock should be traded. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on GuruFocus' valuation method, the stock of Centrais Eletricas Brasileiras SA (EBR, Financial) appears to be modestly overvalued. The GF Value estimates the stock's fair value based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. At its current price of $7.52 per share, Centrais Eletricas Brasileiras SA has a market cap of $17.30 billion and appears to be modestly overvalued. Consequently, the long-term return of its stock is likely to be lower than its business growth.
Financial Strength
Checking the financial strength of a company before buying its stock is crucial. Investing in companies with poor financial strength carries a higher risk of permanent loss. The cash-to-debt ratio and interest coverage provide a good understanding of a company's financial strength. Centrais Eletricas Brasileiras SA has a cash-to-debt ratio of 0.32, which is better than 58.17% of 416 companies in the Utilities - Independent Power Producers industry. However, the overall financial strength of Centrais Eletricas Brasileiras SA is 4 out of 10, indicating that its financial strength is poor.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Centrais Eletricas Brasileiras SA has been profitable 6 times over the past 10 years. Over the past twelve months, the company had a revenue of $6.90 billion and Earnings Per Share (EPS) of $0.27. Its operating margin is 23.49%, which ranks better than 64.88% of 410 companies in the Utilities - Independent Power Producers industry. Overall, the profitability of Centrais Eletricas Brasileiras SA is ranked 5 out of 10, indicating fair profitability.
Growth is probably the most important factor in the valuation of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. However, the 3-year average annual revenue growth of Centrais Eletricas Brasileiras SA is -3.6%, which ranks worse than 79.89% of 363 companies in the Utilities - Independent Power Producers industry. The 3-year average EBITDA growth rate is -4.3%, which ranks worse than 72.43% of 341 companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate a company's profitability. 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 the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, Centrais Eletricas Brasileiras SA's ROIC is 3.29 while its WACC came in at 7.45.
Conclusion
In conclusion, the stock of Centrais Eletricas Brasileiras SA (EBR, Financial) appears to be modestly overvalued. The company's financial condition is poor, its profitability is fair, and its growth ranks worse than 72.43% of 341 companies in the Utilities - Independent Power Producers industry. To learn more about Centrais Eletricas Brasileiras SA stock, you can check out its 30-Year Financials here.
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