What happened

Shares of chemicals-maker Avantor (NYSE:AVTR) closed 14.4% higher Thursday after reporting Q1 2020 earnings results that exceeded analyst expectations for both sales and earnings.

Analysts had forecast Avantor would earn $0.15 per share on $1.47 billion in sales. In fact, Avantor earned $0.17 per share on sales of $1.52 billion.

Rising red stock arrow representing a stock going up drawn on a yellow background

Image source: Getty Images.

So what

In Q1, sales grew only 3% to $1.5 billion, which doesn't sound so hot. Nevertheless, Avantor CEO Michael Stubblefield said that Avantor is indeed "supporting customers with the mission-critical products and solutions they need to detect and treat COVID-19." Sales may not have grown too strongly, but the profits on those sales did. Avantor went from a Q1 2019 GAAP loss to a Q1 2020 GAAP profit of $0.05 per diluted share and "adjusted EPS [earnings per share]" surging 64% to $0.17 per share.

Best of all, though, was Avantor's free cash flow. From positive cash profits of only about $63 million a year ago, Avantor raced ahead to book cash profits of more than $240 million in this year's Q1 -- a fourfold increase!

Now what

That number alone probably suffices to explain why investors were so enthused about Avantor stock today. Should Avantor be able to replicate it throughout the rest of this year, it implies a free cash flow (FCF) run rate of nearly $1 billion. Compared to the company's market capitalization of only $9.7 billion, this would result in a price-to-free cash flow ratio of less than 10 -- not too shabby for a stock that just tripled its FCF number.

The fact is, if Avantor even grows "only" as fast as the 18% long-term annualized earnings growth rate that Wall Street has predicted for it, an Avantor stock generating $1 billion a year in positive free cash flow should be a screaming buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.