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 cheap Imperial Sugar
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.
Imperial Sugar has a P/E ratio of 1.2 and a negative EV/FCF ratio over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Imperial Sugar has a P/E ratio of 5.1 and a negative five-year EV/FCF ratio.
A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.
Imperial Sugar has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates.
Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.
Numerically, we've seen how Imperial Sugar'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, Imperial Sugar's net income margin has ranged from -5.6% to 17.6%. In that same time frame, unlevered free cash flow margin has ranged from -21.5% to 8.9%.
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, Imperial Sugar has tallied up 3 years of positive earnings and 2 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.
Unfortunately, due to Imperial's prior losses it doesn't have meaningful trailing growth. And Wall Street analysts don't have estimates for future growth. It's a similar story at Farmer Brothers. ConAgra and Sysco both show moderate trailing growth (2%-6%) and higher expected growth (8%-10%).
The bottom line
The pile of numbers we've plowed through has shown us how cheap shares of Imperial Sugar are trading, how consistent its performance has been, 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 1.2 P/E ratio.
But I do warn you. If you're enamored with that too-good-to-be-true P/E ratio, well, it's too good to be true. The low ratio is a result of a one-time insurance settlement relating to a 2008 plant explosion in Georgia.
If you still find Imperial Sugar's numbers compelling, don't stop. Continue your due diligence process until you're confident that the initial numbers aren't lying to you.
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Anand Chokkavelu doesn't own shares in any company mentioned. Sysco is a Motley Fool Inside Value selection. Sysco is a Motley Fool Income Investor pick. The Fool owns shares of Sysco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.