Is Life Technologies' Stock Cheaper Than Its 20 P/E Ratio?

Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.
  • The consistency of past earnings and cash flow.
  • How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap Life Technologies (Nasdaq: LIFE  ) might be.

We'll discuss the numbers against some competitors and industry-mates: Affymetrix (Nasdaq: AFFX  ) , Agilent Technologies (NYSE: A  ) , and Illumina (Nasdaq: ILMN  ) .

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Life Technologies has a P/E ratio of 20.4 and an EV/FCF ratio of 13.2 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Life Technologies has a P/E ratio of 42.4 and a five-year EV/FCF ratio of 18.1.

A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.

Life Technologies has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry-mates. 

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Life Technologies 20.4 13.2 42.4 18.1
Affymetrix NM 5.8 NM 9.2
Agilent Technologies 12.5 10.1 21.2 15.5
Illumina 34.0 12.2 >100.0 26.2

Source: S&P Capital IQ. NM = not meaningful due to losses.

Numerically, we've seen how Life Technologies' valuation rates on both an absolute and relative basis. Next, let's examine...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, Life Technologies' net income margin has ranged from -0.6% to 11.3%. In that same time frame, unlevered free cash flow margin has ranged from 19% to 23.8%.

How do those figures compare with those of the company's peers? See for yourself:

Source: S&P Capital IQ; margin ranges are combined.

Additionally, over the last five years, Life Technologies has tallied up four years of positive earnings and five years of positive free cash flow.

Next, let's figure out...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Life Technologies has put up past EPS growth rates of 14.6%. Meanwhile, Wall Street's analysts expect future growth rates of 9.4%.

Here's how Life Technologies compares to its peers for trailing five-year growth (due to losses, Affymetrix's trailing growth rate isn't meaningful):

Source: S&P Capital IQ; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples shares of Life Technologies are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 20.4 P/E ratio, and we see that Life's EV/FCF multiples are a bit cheaper than its P/E ratios. Versus peers, it's mixed, but Agilent has lower price multiples across the board.

Looking at margins, Life stayed positive on earnings and cash flow over the last five years except for one slightly negative year on earnings. None of its peers was able to be perfect on profitability either.

On growth, Life's past growth was solid, if less than the high-growth Illumina. Looking ahead, analysts think Life will have the lowest growth of the group.

Life is cheaper than its 20 P/E ratio would indicate (when you look at EV/FCF, and there are some reasonable operational numbers backing up Life's valuation. Our CAPS community rates it four stars out of five. But these initial numbers are just a start. If you find Life Technologies' numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.

I wrote about a stock that's flying under the radar in our brand-new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy to find out the name of the company I believe Warren Buffett would be interested in if he could still invest in small companies.

Anand Chokkavelu doesn't own shares in any company mentioned. Motley Fool newsletter services have recommended buying shares of Illumina. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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