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.)
1. ConocoPhillips (NYSE: COP): Operates as an integrated energy company worldwide. Levered free cash flow at $11.31B vs. enterprise value at $111.73B (implies a LFCF/EV ratio at 10.12%). Revenue grew by 33.58% during the most recent quarter ($66,961M vs. $50,127M y/y). Accounts receivable grew by 27.34% during the same time period ($16,805M vs. $13,197M y/y). Receivables, as a percentage of current assets, decreased from 49.49% to 48.46% during the most recent quarter (comparing three months ending June 30, 2011, to three months ending June 30, 2010).
2. Statoil ASA (NYSE: STO): Engages in the exploration, production, transportation, refining, and marketing of petroleum and petroleum-derived products. Levered free cash flow at $15.27B vs. enterprise value at $77.18B (implies a LFCF/EV ratio at 19.78%). Revenue grew by 30.29% during the most recent quarter ($168,765M vs. $129,526M y/y). Accounts receivable grew by 3.61% during the same time period ($67,956M vs. $65,587M y/y). Receivables, as a percentage of current assets, decreased from 54.8% to 38.43% during the most recent quarter (comparing three months ending June 30, 2011, to three months ending June 30, 2010).
3. Marathon Oil (NYSE: MRO): Operates as an international energy company with operations in the United States, Canada, Africa, the Middle East, and Europe. Levered free cash flow at $3.29B vs. enterprise value at $17.78B (implies a LFCF/EV ratio at 18.5%). Revenue grew by 33.14% during the most recent quarter ($3,865M vs. $2,903M y/y). Accounts receivable dropped by 63.35% during the same time period ($1,843M vs. $5,028M y/y). Receivables, as a percentage of current assets, decreased from 44.65% to 25.2% during the most recent quarter (comparing three months ending June 30, 2011, to three months ending June 30, 2010).
4. CF Industries Holdings (NYSE: CF): CF Industries Holdings,, through its subsidiary, CF Industries,, manufactures and distributes nitrogen and phosphate fertilizer products, serving agricultural and industrial customers worldwide. Levered free cash flow at $1.72B vs. enterprise value at $12.00B (implies a LFCF/EV ratio at 14.33%). Revenue grew by 37.76% during the most recent quarter ($1,801.7M vs. $1,307.9M y/y). Accounts receivable grew by 22.19% during the same time period ($424.5M vs. $347.4M y/y). Receivables, as a percentage of current assets, decreased from 27.41% to 20.4% during the most recent quarter (comparing three months ending June 30, 2011, to three months ending June 30, 2010).
5. Nexen (NYSE: NXY): Operates as an independent energy company worldwide. Levered free cash flow at $1.45B vs. enterprise value at $12.51B (implies a LFCF/EV ratio at 11.59%). Revenue grew by 14.35% during the most recent quarter ($1,602M vs. $1,401M y/y). Accounts receivable dropped by 30.06% during the same time period ($1,871M vs. $2,675M y/y). Receivables, as a percentage of current assets, decreased from 59.67% to 49.17% during the most recent quarter (comparing three months ending June 30, 2011, to three months ending June 30, 2010).
6. HollyFrontier (NYSE: HFC): Operates as an independent petroleum refiner and marketer in the United States. Levered free cash flow at $394.45M vs. enterprise value at $3.61B (implies a LFCF/EV ratio at 10.93%). Revenue grew by 38.27% during the most recent quarter ($2,967.13M vs. $2,145.86M y/y). Accounts receivable grew by 31.56% during the same time period ($1,003.53M vs. $762.77M y/y). Receivables, as a percentage of current assets, decreased from 55.07% to 49.56% during the most recent quarter (comparing three months ending June 30, 2011, to three months ending June 30, 2010).
7. Ashland (NYSE: ASH): Operates as a specialty chemicals company in the United States and internationally. Levered free cash flow at $420.38M vs. enterprise value at $3.77B (implies a LFCF/EV ratio at 11.15%). Revenue grew by 12.79% during the most recent quarter ($1,667M vs. $1,478M y/y). Accounts receivable dropped by 20.52% during the same time period ($1,247M vs. $1,569M y/y). Receivables, as a percentage of current assets, decreased from 55.68% to 41.35% during the most recent quarter (comparing three months ending June 30, 2011, to three months ending June 30, 2010).
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.
