Time Is Right For Cash Flow

6/25/2012


Now seems a good time to look for values based on the ratio of share price to free cash flow per share, for four reasons:

• The price/free-cash-flow (P/FCF) ratio has been among the most effective metrics in our Quadrix stock-rating system since 1992. Free cash flow, which equals cash provided by operations minus capital spending and dividends, measures the excess cash flow a company is generating.

• Most value-related metrics have not been very effective since mid-2009, but P/FCF has begun to work again. In fact, over the last year, P/FCF and dividend yield are the only value-related metrics that have worked.

• After nearly 12 years of sideways trading, investors have a "cash-on-the-barrelhead" mentality, with dividend yield among the best-performing metrics in all of Quadrix over the past year. But stocks with high dividend yields are now expensive relative to historical norms, so a shift toward companies with free cash flow (and the wherewithal to fund dividend increases) seems logical.

• You don't have to put all your eggs in one basket, as many P/FCF standouts have broad-based appeal. Below are eight Buy-rated stocks with scores of at least 70 for P/FCF ratio, meaning they are cheaper than about 70% of U.S. stocks on this ratio. All eight are cheap on other key valuation metrics and earn Overall scores above 75.

STANDOUTS ON PRICE/FREE-CASH-FLOW RATIO
The eight stocks below are cheaper than roughly 70% of U.S.-traded stocks based on price/free-cash-flow (P/FCF) ratio. For example, Aetna's ($41; AET) P/FCF ratio of 6.6 is lower than about 87% of U.S.-traded stocks.
Quadrix Scores
Enterprise
Value/EBITDA
Price/
--- Earnings ---
Price/Free
--- Cash Flow ---
Company (Price; Ticker)
Overall
Value
Ratio
%
Rank
Ratio
%
Rank
Ratio
%
Rank
Aetna ($41; AET)
86
91
4.1
87
7.7
89
6.6
87
Aflac ($42; AFL)
96
98
NA
NA
8.0
88
1.6
99
CA Technologies
($27; CA)
96
78
5.7
74
12.8
63
10.2
76
CF Industries
($17; CF)
100
95
3.3
92
6.8
92
6.8
87
Cisco Systems
($17; CSCO)
79
90
4.7
83
11.2
73
10.4
75
Macy's ($37; M)
83
78
5.7
73
11.9
69
10.6
74
Microsoft
($31; MSFT)
87
73
6.5
65
10.6
76
11.5
70
UnitedHealth
($60; UNH)
92
65
6.2
68
12.1
68
8.3
82

Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com