Do you buy groceries? Clothes? Toilet paper? Tires for your car? Paperclips? These purchases all go under the category of "consumer goods," and they represent a very large industry.
For this list we searched for consumer good stocks with market caps over $300 million that appear undervalued to the levered free cash flow / enterprise value ratio.
Having trouble with these terms? Have no fear, we all start at the beginning. Let's take a look at these key terms and why they are valuable tools in analyzing a company's value.
Market capitalization, commonly referred to as market cap, is the total market value of a company's outstanding shares. It can be thought of as a measure of company's size. It can be calculated by multiplying the number of shares by the current price of the shares.
A company's size can matter when examining risk. Stocks with large market caps are generally less volatile than those with small market caps.
Levered free cash flow is a calculation of the amount of cash that a company holds after it has paid taxes, repayments on its debts, and any expenditures to maintain or expand business (capital expenditure or capex). In other words, levered free cash flow is the money that the business can use to grow and pay dividends to shareholders.
Enterprise value is an alternative measure of a company's value (instead of using market cap). Theoretically, it is the cost of taking over a company, calculated as market cap plus debt and liabilities minus cash. For example, if Company A were to buy 100% of Company B, it would need to buy all the outstanding shares, the value of which is the market cap. Company A would then be stuck with any debts and liabilities that Company B had. But Company A would also get all of the cash that Company B had in the bank, which would help pay off the debts, etc.
Because cash is an important asset for a company (it allows them to buy new machines, hire more people, etc.), and because it is hard to lie about how much cash a company has, a company that holds more cash is seen to be of better value.
The levered free cash flow to enterprise value ratio (LFCF/EV) is one method of measuring the value of a company. The more free cash a company has relative to its enterprise value (a high ratio), the cheaper the company appears.
Do you think these companies are undervalued? Use the following information as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. General Motors
3. National Beverage
5. Ford Motor
6. Industrias Bachoco
7. Sara Lee Corp.
8. TRW Automotive Holdings
9. PH Glatfelter
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Becca Lipman does not own any of the shares mentioned above.