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 Akamai
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 -- 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.
Akamai has a P/E ratio of 40.9 and an EV/FCF ratio of 26.2 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Akamai has a P/E ratio of 56.4 and a five-year EV/FCF ratio of 29.6.
A positive one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.
Akamai is zero for four on 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 |
|---|---|---|---|---|
|
Akamai |
40.9 |
26.2 |
56.4 |
29.6 |
|
Level 3 Communications |
NM |
31.2 |
NM |
33.0 |
|
Limelight Networks |
NM |
NM |
NM |
NM |
|
DG FastChannel |
22.1 |
10.5 |
52.9 |
21.7 |
Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.
Numerically, we've seen how Akamai'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, Akamai's net income margin has ranged from 13.4% to 18.4%. In that same time frame, unlevered free cash flow margin has ranged from 18.2% to 40.2%.
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, Akamai has tallied up five years of positive earnings and five years of positive free cash flow.
Next, let's figure out ...
How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.
Let's start by seeing what this company's done over the past five years. In that time period, Akamai has put up past EPS growth rates of -15.6%. Meanwhile, Wall Street's analysts expect future growth rates of 17%.
Here's how Akamai compares to its peers for trailing five-year growth. Periods of unprofitability makes a comparison not meaningful for Akamai's competitors. Akamai's growth is negative largely thanks to a large income tax benefit that boosted its net income five years ago:
Source: Capital IQ, a division of Standard & Poor's; EPS growth shown.
And here's how it measures up with regard to the growth analysts expect over the next five years:
Source: Capital IQ, a division of Standard & Poor's; estimates for EPS growth.
The bottom line
The pile of numbers we've plowed through has shown us the price multiples shares of Akamai are trading at, the volatility of its operational performance, and what kind of growth profile it has -- 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 40.9 P/E ratio, and we see slightly cheaper cash flow multiples. We also see consistently profitable margins as well as analyst expectations for solid future growth. While certainly not cheap in traditional terms, it all depends on your expectations for Akamai's future growth and profitability. If you find Akamai's numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.
