Accounting Flags: Are These 10 Stocks Undervalued or Are They Value Traps?

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(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA)

A company’s share value, or price, can say a lot about the company. The price is not only telling of the company’s past and present performance, but it also accounts for future performance as analysts and investors envision it will play out.

To that extent, there are several technical ratios investors can use to decide if the current price is undervalued or not.

Undervalued by Price Ratios

One of the most common application of price data is the Price to Earnings ratio (P/E). The ratio indicates how much investors are paying for a dollar of earnings. P/E = (Share Price)/(EPS)

Comparing P/E ratios can be complicated — some industries have high earnings growth trends, which inflates a company’s P/E relative to companies in other industries.

This is where PEG ratios become handy. PEG is short for the Price/Earnings to Growth ratio. The PEG ratio takes the P/E ratio one step further by including a calculation for annual earnings (EPS) growth.  PEG = (P/E)/(Annual EPS Growth).  Therefore, the higher the earnings growth the lower the PEG ratio. A PEG below 1 often signals it is undervalued.

Another indicator of price is the Price to Cash Flow ratio, which is measured as share price over cash flow per share. The ratio indicates the market’s expectations of a firm’s future financial health. In theory, the lower the ratio, the better the value. That’s because a low value indicates the firm is generating ample cash that it not reflected in the current share price. In contrast, a high P/CF ratio indicated that the firm is trading at a high price but is not generating enough cash to support the multiple. For our purposes, we looked at ratios below 2.5.

Value Traps? – Ways to Spot Red Flags

Unfortunately, like all fundamental ratios, one metric never tells the full story. It is important to make sure that the company does not appear undervalued for good reasons. Perhaps a low share price is an indication the stock is failing.

So how can you go about spotting red flags? One way is to look at accounts receivable trends. After all, receivables represent money earned but not yet collected. Whenever accounts receivable takes up an increasingly larger portion of revenue, the quality of revenue is considered lower.

However, such increases in accounts receivable could be due to structural changes in the business, such as a new credit policy or an acquisition. There may be several explanations for these trends, but whenever accounts receivable growth exceeds revenue growth, it flags the investor to take a second look.

The List

Interested? The following list of undervalued companies, as measured by price to cash flow and price to earnings growth ratios, all have negative account receivable trends. Do you feel any of these companies are truly undervalued or are they value traps?

Analyze These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned

List sorted alphabetically.

1. AutoNavi Holdings Limited (AMAP): Provides digital map content and navigation and location-based solutions in the People's Republic of China (PRC). PEG ratio at 0.43, and Price/Cash ratio at 2.75. Revenue grew by 41.15% during the most recent quarter ($33.89M vs. $24.01M y/y). Accounts receivable grew by 58.82% during the same time period ($39.42M vs. $24.82M y/y). Receivables, as a percentage of current assets, increased from 13.28% to 17.2% during the most recent quarter (comparing 3 months ending 2011-09-30 to 3 months ending 2010-09-30).

2. Advanced Micro Devices, Inc. (AMD): Operates as a semiconductor company in the United States, Japan, China, and Europe. PEG ratio at 0.53, and Price/Cash ratio at 2.09. Revenue grew by 4.45% during the most recent quarter ($1,690M vs. $1,618M y/y). Accounts receivable grew by 18.69% during the same time period ($908M vs. $765M y/y). Receivables, as a percentage of current assets, increased from 23.82% to 26.61% during the most recent quarter (comparing 13 weeks ending 2011-10-01 to 13 weeks ending 2010-09-25).

3. Charm Communications Inc. (CHRM): Operates as an advertising agency in China. PEG ratio at 0.6, and Price/Cash ratio at 2.7. Revenue grew by 45.06% during the most recent quarter ($70.24M vs. $48.42M y/y). Accounts receivable grew by 115.03% during the same time period ($116.01M vs. $53.95M y/y). Receivables, as a percentage of current assets, increased from 22.05% to 32.56% during the most recent quarter (comparing 3 months ending 2011-09-30 to 3 months ending 2010-09-30).

4. Enstar Group Limited (ESGR): Enstar Group Limited, through its subsidiaries, acquires and manages insurance and reinsurance companies in run-off. PEG ratio at 0.85, and Price/Cash ratio at 0.32. Revenue grew by -64.73% during the most recent quarter ($11.61M vs. $32.92M y/y). Accounts receivable grew by 108.87% during the same time period ($2,005.88M vs. $960.33M y/y). Receivables, as a percentage of current assets, increased from 20.1% to 29.85% during the most recent quarter (comparing 3 months ending 2011-09-30 to 3 months ending 2010-09-30).

5. Shanda Games Limited (GAME): Engages in the development and operation of online games in the People's Republic of China. PEG ratio at 0.45, and Price/Cash ratio at 2.21. Revenue grew by 23.4% during the most recent quarter ($1,352.8M vs. $1,096.3M y/y). Accounts receivable grew by 197.63% during the same time period ($1,330.1M vs. $446.9M y/y). Receivables, as a percentage of current assets, increased from 10.85% to 24.78% during the most recent quarter (comparing 3 months ending 2011-09-30 to 3 months ending 2010-09-30).

6. Gafisa S.A. (GFA): Operates as a homebuilder in Brazil. PEG ratio at 0.23, and Price/Cash ratio at 2.43. Revenue grew by 5.04% during the most recent quarter ($1,005.49M vs. $957.2M y/y). Accounts receivable grew by 43.87% during the same time period ($4,148.67M vs. $2,883.72M y/y). Receivables, as a percentage of current assets, increased from 51.34% to 57.34% during the most recent quarter (comparing 3 months ending 2011-09-30 to 3 months ending 2010-09-30).

7. General Motors Company (GM): Operates as a global automaker. PEG ratio at 0.37, and Price/Cash ratio at 1.03. Revenue grew by 7.81% during the most recent quarter ($36,719M vs. $34,060M y/y). Accounts receivable grew by 20.48% during the same time period ($10,512M vs. $8,725M y/y). Receivables, as a percentage of current assets, increased from 14.17% to 16.42% during the most recent quarter (comparing 3 months ending 2011-09-30 to 3 months ending 2010-09-30).

8. Navios Maritime Holdings Inc. (NM): Operates as a seaborne shipping and logistics company in Greece. PEG ratio at 0.32, and Price/Cash ratio at 1.87. Revenue grew by 2.13% during the most recent quarter ($173.81M vs. $170.18M y/y). Accounts receivable grew by 80.09% during the same time period ($148.41M vs. $82.41M y/y). Receivables, as a percentage of current assets, increased from 19.19% to 36.16% during the most recent quarter (comparing 3 months ending 2011-09-30 to 3 months ending 2010-09-30).

9. Quanex Building Products Corporation (NX): Provides engineered products and aluminum sheet products. PEG ratio at 0.38, and Price/Cash ratio at 2.48. Revenue grew by 12.08% during the most recent quarter ($252.41M vs. $225.2M y/y). Accounts receivable grew by 26.77% during the same time period ($100.83M vs. $79.54M y/y). Receivables, as a percentage of current assets, increased from 24.73% to 40.22% during the most recent quarter (comparing 3 months ending 2011-07-31 to 3 months ending 2010-07-31).

10. Trina Solar Ltd. (TSL): Designs, develops, manufactures, and sells photovoltaic (PV) modules worldwide. PEG ratio at 0.3, and Price/Cash ratio at 0.69. Revenue grew by 56.29% during the most recent quarter ($579.46M vs. $370.76M y/y). Accounts receivable grew by 86.57% during the same time period ($584.05M vs. $313.04M y/y). Receivables, as a percentage of current assets, increased from 25.76% to 34.27% during the most recent quarter (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30). 



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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