Interested in large material companies with encouraging accounting trends?
We ran a screen on mega-cap material goods stocks for those that have seen positive trends in their accounts receivable, with increases in quarterly revenue year over year outpacing changes in quarterly accounts receivable. We also screened for companies that have seen a decrease in accounts receivable as a percent of current assets year over year.
In addition, we searched for companies that appear undervalued by the levered free cash flow to enterprise value ratio.
Want a closer look at these terms? Let's review:
Accounts receivable represents money earned but not yet collected, and there is no guarantee that the money will be paid back in full. So when receivables become a lesser part of the revenue reported by a company, it indicates higher quality revenues.
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. Companies with higher market cap are considered to have more trustworthy information because they have greater histories of profitability and data. We define mega-cap stocks as the 200 largest stocks by market cap.
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 expenditures). 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 is one method of comparing the value of a company to others. 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.)
2. Statoil ASA
3. Marathon Oil
4. CF Industries Holdings
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 and Eben Esterhuizen do not own any of the shares mentioned above. Levered free cash flow from Yahoo! Finance. Accounting data from Google Finance.
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