10 Companies with Strong Sales Trends Undervalued by Levered Free Cash Flows

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(Written by Alexander Crawford, list compiled by Eben Esterhuizen, CFA. Levered free cash flow and enterprise value data sourced from Yahoo! Finance, accounting data sourced from Google Finance.)

How can you tell if a stock is undervalued? Truth be told, there are many accepted ways to determine this, and many different measures to consider using, but one very interesting option is levered free cash flow/enterprise value.

Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt, so it is a measure of cash flow relevant to shareholders.

Enterprise value is the sum of the firm’s value from all ownership sources: market cap, outstanding debt, and preferred shares. From this value we subtract cash holdings because, in the event of a takeover, that cash would be used towards the takeover price.

Therefore, a company with a higher ratio of levered free cash flow/enterprise value appears more undervalued, given its levered free cash flows.

We ran a screen on stocks that appear undervalued by this measure, but we also wanted to search for companies with strong sales trends. One way to determine this is by comparing revenue growth with growth in inventory.

Inventory can represent two things: the company’s expectation of what they will soon sell, and also what the company has not yet sold. Therefore, a growing inventory by itself can mean a more positive sales outlook, or the inability to sell products.

However, compared with revenue, inventory tells a different story. If inventory grows faster than revenue, it probably indicates that the company is having trouble selling its inventory.

Of course, other explanations can exist such as changes in company policy.

We ran a screen on over 4,000 US-traded stocks for those that appear undervalued by levered free cash flow/enterprise value. Then, we searched for those exhibiting positive trends in inventory vs. revenue, with growth in quarterly revenue out-pacing growth in inventory, as well as inventory becoming a smaller portion of current assets.

Do you think these companies should be trading higher?

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List sorted by levered free cash flow/enterprise value.

1. Build-A-Bear Workshop Inc. (BBW): Operates as a specialty retailer of plush animals and related products. Levered free cash flow at $13.68M vs. enterprise value at $61.37M (implies a LFCF/EV ratio at 22.29%). MRQ revenue grew by 10.4% over the last year ($81.84M vs. $74.13M y/y). MRQ inventory grew by -19.19% during the same time period ($46.16M vs. $57.12M y/y). MRQ inventory, as a percentage of current assets, decreased from 49.07% to 39.91% over the last year (comparing 13 weeks ending 2011-07-02 to 13 weeks ending 2010-07-03)

2. Arctic Cat Inc. (ACAT): Designs, engineers, manufactures, and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name in the United States and internationally. Levered free cash flow at $37.77M vs. enterprise value at $194.50M (implies a LFCF/EV ratio at 19.42%). MRQ revenue grew by 18.17% over the last year ($74.93M vs. $63.41M y/y). MRQ inventory grew by -1.76% during the same time period ($86.52M vs. $88.07M y/y). MRQ inventory, as a percentage of current assets, decreased from 44.08% to 35.95% over the last year (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30)

3. Noranda Aluminum Holding Corp. (NOR): Engages in the production and sale of primary aluminum products and rolled aluminum coils in the United States. Levered free cash flow at $163.74M vs. enterprise value at $899.63M (implies a LFCF/EV ratio at 18.2%). MRQ revenue grew by 27.29% over the last year ($426.3M vs. $334.9M y/y). MRQ inventory grew by 12.91% during the same time period ($210.2M vs. $186.16M y/y). MRQ inventory, as a percentage of current assets, decreased from 49.49% to 42.28% over the last year (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30)

4. Lawson Products Inc. (LAWS): Distributes products and services to the industrial, commercial, institutional, and governmental maintenance, repair, and operations marketplace in the United States and Canada. Levered free cash flow at $20.42M vs. enterprise value at $114.74M (implies a LFCF/EV ratio at 17.8%). MRQ revenue grew by 4.78% over the last year ($84.15M vs. $80.31M y/y). MRQ inventory grew by -32.74% during the same time period ($50.49M vs. $75.07M y/y). MRQ inventory, as a percentage of current assets, decreased from 51.42% to 41.29% over the last year (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).

5. Western Refining Inc. (WNR): Operates as an independent crude oil refiner and marketer of refined products in Texas, Arizona, New Mexico, Utah, Colorado, and the Mid-Atlantic region. Levered free cash flow at $340.44M vs. enterprise value at $2.32B (implies a LFCF/EV ratio at 14.67%). MRQ revenue grew by 19.23% over the last year ($2,557.88M vs. $2,145.34M y/y). MRQ inventory grew by -18.87% during the same time period ($390.63M vs. $481.49M y/y). MRQ inventory, as a percentage of current assets, decreased from 48.07% to 35.9% over the last year (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).

6. Freeport-McMoRan Copper & Gold Inc. (FCX): Engages in the exploration, mining, and production of mineral resources. Levered free cash flow at $4.84B vs. enterprise value at $37.16B (implies a LFCF/EV ratio at 13.02%). MRQ revenue grew by 50.47% over the last year ($5,814M vs. $3,864M y/y). MRQ inventory grew by 29.42% during the same time period ($3,748M vs. $2,896M y/y). MRQ inventory, as a percentage of current assets, decreased from 39.71% to 36.84% over the last year (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).

7. Systemax Inc. (SYX): Operates as a direct marketer of brand name and private label products. Levered free cash flow at $52.94M vs. enterprise value at $407.17M (implies a LFCF/EV ratio at 13%). MRQ revenue grew by 8.23% over the last year ($872.22M vs. $805.88M y/y). MRQ inventory grew by -5.79% during the same time period ($358.47M vs. $380.49M y/y). MRQ inventory, as a percentage of current assets, decreased from 56.22% to 48.12% over the last year (comparing 13 weeks ending 2011-06-30 to 13 weeks ending 2010-06-30).

8. Finish Line Inc. (FINL): Operates as a mall-based specialty retailer in the United States. Levered free cash flow at $91.34M vs. enterprise value at $788.99M (implies a LFCF/EV ratio at 11.58%). MRQ revenue grew by 10.11% over the last year ($331.51M vs. $301.07M y/y). MRQ inventory grew by 5.9% during the same time period ($229.84M vs. $217.04M y/y). MRQ inventory, as a percentage of current assets, decreased from 44.53% to 43.18% over the last year (comparing 13 weeks ending 2011-08-27 to 13 weeks ending 2010-08-28).

9. DSW Inc. (DSW): Operates as a specialty branded footwear retailer in the U. Levered free cash flow at $197.65M vs. enterprise value at $1.77B (implies a LFCF/EV ratio at 11.17%). MRQ revenue grew by 14.74% over the last year ($476.31M vs. $415.12M y/y). MRQ inventory grew by 2.95% during the same time period ($318.26M vs. $309.14M y/y). MRQ inventory, as a percentage of current assets, decreased from 47.87% to 42.72% over the last year (comparing 3 months ending 2011-07-30 to 3 months ending 2010-07-31).

10. Fresh Del Monte Produce Inc. (FDP): Produces, transports, sources, markets, and distributes fresh and fresh-cut fruit and vegetables worldwide. Levered free cash flow at $167.94M vs. enterprise value at $1.54B (implies a LFCF/EV ratio at 10.91%). MRQ revenue grew by 3.97% over the last year ($1,039.7M vs. $1,000M y/y). MRQ inventory grew by -5.95% during the same time period ($358.7M vs. $381.4M y/y). MRQ inventory, as a percentage of current assets, decreased from 43.92% to 41.86% over the last year (comparing 3 months ending 2011-07-01 to 3 months ending 2010-07-02). 



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets


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