Build-A-Bear Workshop Inc (BBW, Financial) has recently experienced a daily gain of 17.43%, and a 3-month gain of 38.75%. With an Earnings Per Share (EPS) of 3.26, the question arises: Is the stock significantly overvalued? In this article, we delve into a valuation analysis to answer this question. We invite you to read on for a detailed look at the company's financial health and future prospects.
A Snapshot of Build-A-Bear Workshop Inc
Build-A-Bear Workshop Inc is a U.S.-based specialty retailer known for its customized stuffed animals and related products. The company operates in the U.S., Canada, China, Denmark, Ireland, and the U.K., through a combination of corporately-managed locations, e-commerce sites, and temporary stores. Build-A-Bear Workshop also licenses its franchise agreements for store locations in Europe, Asia, Australia, the Middle East, and Africa. The company's commercial segment comprises transactions with other businesses, mainly involving licensing the intellectual properties for third-party use and wholesale activities.
As of August 24, 2023, Build-A-Bear Workshop's stock price stands at $28.64, while its estimated fair value (GF Value) is $21.71, indicating that the stock might be significantly overvalued. With a market cap of $416.10 million and sales of $470.30 million, a deeper analysis is required to understand the true value of Build-A-Bear Workshop.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock, derived from a unique methodology. This GF Value is calculated based on historical trading multiples, a GuruFocus adjustment factor based on the company's past performance and growth, and future business performance estimates. The GF Value Line, displayed on our summary page, provides an overview of the fair value at which the stock should ideally be traded.
If the stock price is significantly above the GF Value Line, it is considered 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. According to this methodology, Build-A-Bear Workshop (BBW, Financial) appears to be significantly overvalued.
Given that Build-A-Bear Workshop is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth. For a list of companies that may deliver higher future returns at reduced risk, click here.
Assessing Financial Strength
Investing in companies with poor financial strength presents a high risk of permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to purchase shares. Key indicators of financial strength include the cash-to-debt ratio and interest coverage. Build-A-Bear Workshop has a cash-to-debt ratio of 0.38, which ranks worse than 55.42% of 1088 companies in the Retail - Cyclical industry. Overall, the financial strength of Build-A-Bear Workshop is rated 7 out of 10, indicating fair financial health.
Profitability and Growth
Investing in profitable companies carries less risk, especially those that have demonstrated consistent profitability over the long term. Build-A-Bear Workshop has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $470.30 million and Earnings Per Share (EPS) of $3.26. Its operating margin of 13.4% is better than 84.72% of 1093 companies in the Retail - Cyclical industry. Overall, GuruFocus ranks Build-A-Bear Workshop's profitability as fair.
The growth of a company is a crucial factor in its valuation. The 3-year average annual revenue growth rate of Build-A-Bear Workshop is 10.2%, which ranks better than 69.16% of 1044 companies in the Retail - Cyclical industry. The 3-year average EBITDA growth rate is 67.7%, which ranks better than 94.56% of 901 companies in the same industry.
Return on Invested Capital vs. Weighted Average 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. Ideally, the return on invested capital should be higher than the weighted cost of capital. For the past 12 months, Build-A-Bear Workshop's ROIC is 25.04, and its cost of capital is 7.29.
Conclusion
In conclusion, the stock of Build-A-Bear Workshop (BBW, Financial) shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 94.56% of 901 companies in the Retail - Cyclical industry. To learn more about Build-A-Bear Workshop stock, you can check out its 30-Year Financials here.
To find out the high-quality companies that may deliver above-average returns, please check out GuruFocus High Quality Low Capex Screener.
