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 Dana Holding
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 (EPS) -- 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.
Dana has a negative P/E ratio and an EV/FCF ratio of 10.0 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Dana has negative ratios for both.
A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.
Dana 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 |
|---|---|---|---|---|
| Dana Holding |
NM |
10.0 |
NM |
NM |
|
American Axle & Manufacturing Holdings |
7.1 |
8.8 |
NM |
NM |
|
ArvinMeritor |
161.0 |
12.4 |
NM |
30.3 |
|
TRW Automotive Holdings |
8.3 |
7.1 |
137.8 |
17.1 |
Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.
Numerically, we've seen how Dana's 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, Dana's net income margin has ranged from (10.4%) to 0.3%. In that same time frame, unlevered free cash flow margin has ranged from (11.9%) to 5.2%.
How do those figures compare with those of the company's peers? See for yourself:
Source: Capital IQ, a division of Standard & Poor's; margin ranges are combined.
Additionally, over the last five years, Dana has tallied up one year of positive earnings and two years of positive free cash flow.
How much growth we can expect
Usually, we'd next take a look at analysts' future growth rate predictions for Dana and its cohorts. Unfortunately, though, there are no five-year analyst estimates for Dana, although the analysts who follow the stock do seem fairly optimistic for its earnings prospects in 2011.
The bottom line
The numbers we've plowed through has shown us the price multiples shares of Dana are trading at and how consistent its financial performance has been -- 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 negative P/E ratio, but the initial numbers are just a start. If you find Dana's numbers compelling, don't stop. Continue your due diligence process until you're confident that the initial numbers aren't lying to you.
Interested in reading more about any of these stocks? Add them to My Watchlist to find all of our Foolish analysis. And for more stock ideas, check out this recent article: The 3 Biggest Fool.com Trends of 2010.
