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Forestar Group Stock Gives Every Indication Of Being Possible Value Trap

·4 min read

- By GF Value

The stock of Forestar Group (NYSE:FOR, 30-year Financials) is believed to be possible value trap, 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 $25.24 per share and the market cap of $1.2 billion, Forestar Group stock is believed to be possible value trap. GF Value for Forestar Group is shown in the chart below.


Forestar Group Stock Gives Every Indication Of Being Possible Value Trap
Forestar Group Stock Gives Every Indication Of Being Possible Value Trap

The reason we think that Forestar Group stock might be a value trap is because Forestar Group has an Altman Z-score of 1.78, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the company, please go here.

Link: These companies may deliever higher future returns at reduced risk.

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. Forestar Group has a cash-to-debt ratio of 0.25, which ranks in the middle range of the companies in Real Estate industry. Based on this, GuruFocus ranks Forestar Group's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Forestar Group over the past years:

Forestar Group Stock Gives Every Indication Of Being Possible Value Trap
Forestar Group Stock Gives Every Indication Of Being Possible Value Trap

It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Forestar Group has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $1.1 billion and earnings of $1.76 a share. Its operating margin is 9.51%, which ranks in the middle range of the companies in Real Estate industry. Overall, GuruFocus ranks the profitability of Forestar Group at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Forestar Group over the past years:

Forestar Group Stock Gives Every Indication Of Being Possible Value Trap
Forestar Group Stock Gives Every Indication Of Being Possible Value Trap

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Forestar Group is 60.8%, which ranks better than 95% of the companies in Real Estate industry. The 3-year average EBITDA growth is -16.1%, which ranks worse than 74% of the companies in Real Estate industry.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Forestar Group's return on invested capital is 5.71, and its cost of capital is 9.41. The historical ROIC vs WACC comparison of Forestar Group is shown below:

Forestar Group Stock Gives Every Indication Of Being Possible Value Trap
Forestar Group Stock Gives Every Indication Of Being Possible Value Trap

In summary, the stock of Forestar Group (NYSE:FOR, 30-year Financials) is believed to be possible value trap. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 74% of the companies in Real Estate industry. To learn more about Forestar Group stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.