Today, we delve into the intrinsic value of Suzano SA (SUZ, Financial), a notable player in the Forest Products industry. With a daily gain of 1.87%, a 3-month gain of 15.73%, and an Earnings Per Share (EPS) (EPS) of 3.45, the question is whether the stock is modestly undervalued. This detailed analysis will explore Suzano SA's valuation, providing insights to guide your investment decisions.
Company Overview
Suzano SA is a significant producer and seller of pulp and a variety of paper products. The company organizes itself into two segments based on product type: Pulp and Paper, with the Pulp segment generating the majority of revenue. The firm's product portfolio includes printing and writing paper, paperboard, diapers, and sanitary napkins. Suzano SA owns forest land and plants in Brazil, where it harvests timber and turns the timber into pulp and paper in its plants. The company draws more revenue from Europe than any other geographic area.
At present, Suzano SA's stock price is $10.87, while the GF Value, an estimation of fair value, is $14.47. This comparison suggests that the stock is modestly undervalued.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
1. Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
2. GuruFocus adjustment factor based on the company's past returns and growth.
3. Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price 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.
Based on GuruFocus' valuation method, Suzano SA's stock gives every indication of being modestly undervalued. GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $10.87 per share, Suzano SA stock gives every indication of being modestly undervalued.
Because Suzano SA is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Thus, it's crucial to review a company's financial strength before deciding whether to buy shares. A good initial perspective on the company's financial strength can be gained by looking at the cash-to-debt ratio and interest coverage. Suzano SA has a cash-to-debt ratio of 0.25, which ranks worse than 58.96% of 268 companies in the Forest Products industry. Based on this, GuruFocus ranks Suzano SA's financial strength as 5 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. Suzano SA has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $9.50 billion and Earnings Per Share (EPS) of $3.45. Its operating margin is 41.61%, which ranks better than 99.65% of 283 companies in the Forest Products industry. Overall, GuruFocus ranks the profitability of Suzano SA at 7 out of 10, indicating fair profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Suzano SA is 24.8%, which ranks better than 90.07% of 272 companies in the Forest Products industry. The 3-year average EBITDA growth rate is 75.1%, which ranks better than 94.12% of 238 companies in the Forest Products industry.
ROIC vs WACC
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Suzano SA's ROIC is 15.28 while its WACC came in at 5.61.
Conclusion
In conclusion, the stock of Suzano SA (SUZ, Financial) gives every indication of being modestly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks better than 94.12% of 238 companies in the Forest Products industry. To learn more about Suzano SA stock, you can check out its 30-Year Financials here.
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