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OldSchoolValue (< 20)

5 Mispriced Stocks Based on P/FCF



July 24, 2010 – Comments (1) | RELATED TICKERS: BZ.DL , CENT , MU

Free cash flow is an important measure for a value investor. A company that can generate positive free cash flow will be able to fund operations moving forwards, pay their dividends, do not rely on debt and best of all will not declare bankruptcy or be in financial health.

The common FCF formula is

Cash from operations - Capital expenditure

Once you know the FCF you can then find the Price to FCF ratio by the following

Market Cap / FCF

I like the P/FCF measure because not only is it overlooked but it provides a unique view into how cheap a company really is. Since FCF represents the cash that a company is able to generate after spending money to maintain or expand its asset base, FCF a much better "earnings" guide than plain old EPS that can be manipulated by accounting tricks.

If Wall Street focuses on PE as a measuring stick for cheapness, than P/FCF is the measuring stick for value investors.

As an example, look at some of these companies

Ticker | P/E | P/FCF |
IBM | 12.5 | 12 |

PFE | 11.72 | 7.6 |

JNJ | 12.5 | 16.9 |

As you can see, IBM, PFE and JNJ are great investments but PFE being the exception, IBM and JNJ are selling for over 10x FCF.

Name | Ticker | P/E | P/FCF

Boise | BZ |  3.4 | 1.34

Central Garden & Pet Co | CENT | 9.6 | 2.8

Micron Technology | MU | 5.8 | 4

Collective Brands | PSS | 10.2 | 4.85

Signet Jewelers | SIG | 12.7 | 5.22


The above 5 stocks all cheap based on P/FCF. Boise current market value is just a little more than its FCF.

These stocks are much smaller in comparison to the giants of IBM, PFE and JNJ but certainly worth a closer look.


None. Free spreadsheets and stock analysis tools at OldSchoolValue


1 Comments – Post Your Own

#1) On July 31, 2010 at 4:30 PM, TLassen (56.88) wrote:

But why mix Price to Free Cash Flow? The 'P' is a wealth or observational metric, it measures the secondary's markets expectations of value. The FCF itself is important because it is a performance measurement or metric under company control.

When you are using a static 10x FCF you are actually just discounting Free Cash flow by 10% and you assume that if an investor pays more than 10 x for a company's future discounted cash that he is overpaying. To me it makes little sense. A company with higher earnings (whether measured as FCF or NOPAT or EPS) will be traded at higher multiples to a company with little earnings. There is a reason why some companies trade close to book value or cash value, they do so because they deserve to. Looking at PFE (low actual earnings=low multiple, JNJ mid earnings = mid multiples and AAPL (thrown in for effect!) high earnings = higher multiples.

Far be it for me to point out that discounting FCF against GDP growth and inflation rate is far more effective to obtain the value of a company. When GDP growth is below and inflation is above historic averages, you need to increase the discount value and vice versa. When GDP growth is above and inflation is below historic levels you need to decrease the discount value.

Longwinded explanantion to say I dont favor static multiples whether expressed as a multiple or a yield.



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