Should You Buy Valhi, Inc. (NYSE: VHI) When Prices Drop?

in INVESTING IDEAS by

Valhi, Inc. (NYSE: VHI) investors have enjoyed seeing the stock price increase by 40.6% over the last month. As a mid-cap stock, hardly covered by analysts, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. However, could the stock still be trading at a relatively cheap price? Let’s take a look at the company’s expected growth and valuation based on its most recent financial data to see if there is further upside moving forward.


Is Valhi Still Cheap?

According to my valuation models, the stock is currently overvalued by approximately -60.4%, trading at $8.80 compared to its intrinsic value of $3.48. Not the best news for investors looking to buy!

Valhi, Inc. Valuation Detail
Analysis Model Fair Value Upside (Downside)
10-yr DCF Revenue Exit $1.34 -84.8%
5-yr DCF Revenue Exit $3.45 -60.8%
Peer Revenue Multiples $6.95 -21.0%
5-yr DCF EBITDA Exit $0.92 -89.5%
Peer EBITDA Multiples $3.41 -61.2%
Peer P/E Multiples $7.46 -15.2%
Dividend Discount Model $1.55 -82.4%
Dividend Discount Model (multi-stage) $2.78 -68.4%
Average $3.48 -60.4%

Click on any of the analyses above to view the latest model with real-time data.

However, will there be another opportunity to buy low in the future? Given that Valhi’s stock is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) could mean the price can sink lower, giving investors another chance to buy in the future. This is based on its beta of 3.77, which is a good indicator for share price volatility.


What Does The Future Of Valhi Look Like?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company’s future expectations.

Valhi projected revenue chartsource: finbox.io data explorer

Valhi’s revenue growth is expected to average 2.0% over the next five fiscal years indicating that the core business could be in real trouble. In fact, this could imply that its products or services are losing demand and/or becoming irrelevant.


How This Impacts You

Many investors separate stocks into value and growth categories based on quantitative metrics. However, one of the most famous investors in the world views this as foolish. In Warren Buffett’s 1992 letter to Berkshire Hathaway shareholders, Buffett touches upon a subject at odds with much of the investment industry:

“Most analysts feel they must choose between two approaches customarily thought to be in opposition: ‘value’ and ‘growth.’ Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. We view that as fuzzy thinking… In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value.”

While investors tend to categorize stocks into value and growth, some of the most successful investors view growth as simply one component of a company’s value.

Unfortunately for shareholders, Valhi’s future growth is relatively low and it appears the stock is now trading above its intrinsic value. Therefore, it may be a good time to begin reducing your position in the company. However, there are also other factors to consider that could explain the current overvaluation.

But before making an investment decision, I recommend you continue to research Valhi to get a more comprehensive view of the company by looking at:

Risk Metrics: what is Valhi’s Altman Z score? It’s a famous formula used to predict the probability that a firm will go into bankruptcy within two years. View the company’s Altman Z score here.

Valuation Metrics: how much upside do shares of Valhi have based on the Ben Graham Formula? Take a look at our Ben Graham Formula data explorer which also compares the company’s upside to its peers.

Efficiency Metrics: how much free cash flow does Valhi generate as a percentage of total sales? Has it been increasing or decreasing over time? Review the firm’s free cash flow margin here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Expertise: financial modeling, mergers & acquisitions. Andy is also a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to do investment research. Andy’s background is in investment banking where he led the analysis on over 50 board advisory engagements involving mergers and acquisitions, fairness opinions and solvency opinions. Some of his board advisory highlights: - Sears Holdings Corp.’s $620 mm spin-off via rights offering of Sears Outlet, Hometown Stores and Sears Hardware Stores. - Cerberus Capital Management’s $3.3 bn acquisition of SUPERVALU Inc.’s New Albertsons, Inc. assets. Andy can be reached at andy@finbox.io or at +1 (516) 778-6257.

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