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To create the list below we looked for those technology companies that appear undervalued relative to their cash flows, indicated by high ratios of levered free cash flow/enterprise value.

Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. When companies have ratios of levered free cash flow/enterprise value in excess of 10%, it may indicate that the company as a whole is being undervalued. This ratio gives us the money that the business can use to grow and pay dividends to shareholders.

We continued by looking for those that appear undervalued relative to EPS trends. Based on the theoretical assumption that if P/E is equal to a constant K, growth in EPS estimates should be matched by proportionate growth in price. When they don't match up, a mispricing may have occurred. We screened for those exhibiting this mismatch between changes in EPS estimate and price.

The List

For an ‪interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.

Do you think these industrial stocks look attractive? Use this list as a starting point for your own analysis.

1. Aeroflex Holding Corp. (ARX): Designs, engineers, manufactures, and sells microelectronics, and test solution and measurement equipment in the United States, Europe, the Middle East, Asia, and Australia.

  • Market cap at $643.77M, most recent closing price at $7.13.
  • Levered free cash flow at $135.94M vs. enterprise value at $1.30B (implies a LFCF/EV ratio at 10.46%).
  • The EPS estimate for the company's current year increased from 0.43 to 0.46 over the last 30 days, an increase of 6.98%. This increase came during a time when the stock price changed by 5.89% (from 8.15 to 8.63 over the last 30 days).
  • Take note: The company's earnings growth looks weak, with EPS growing by -40.75% over the last year. This is considerably weaker than competitors like Taiwan Semiconductor Manufacturing Co. Ltd. (EPS growth over the last year at -16.37%) and Xilinx Inc. (EPS growth over the last year at -18.66%).

2. Atlantic Tele-Network, Inc. (ATNI): Provides telecommunications services to rural, niche, and other under-served markets and geographies in the United States, Bermuda, and the Caribbean.

  • Market cap at $734.9M, most recent closing price at $47.55.
  • Levered free cash flow at $108.91M vs. enterprise value at $834.10M (implies a LFCF/EV ratio at 13.06%).
  • The EPS estimate for the company's current year increased from 2.3 to 2.52 over the last 30 days, an increase of 9.57%. This increase came during a time when the stock price changed by 3.62% (from 43.64 to 45.22 over the last 30 days).
  • Unlike the other two names on this list ATNI has reported strong earnings growth over the last year, with EPS growing by 122.54%, higher than competitors like Chunghwa Telecom Co. Ltd. (EPS growth over the last year at 24.90%) and BCE, Inc. (EPS growth over the last year at 17.72%).

3. Computer Sciences Corporation (CSC): Provides information technology (IT) and professional services to governments and commercial enterprises.

  • Market cap at $7.44B, most recent closing price at $48.46.
  • Levered free cash flow at $1.17B vs. enterprise value at $7.88B (implies a LFCF/EV ratio at 14.85%).
  • The EPS estimate for the company's current year increased from 2.4 to 2.73 over the last 30 days, an increase of 13.75%. This increase came during a time when the stock price changed by 1.06% (from 48.07 to 48.58 over the last 30 days).
  • A cautious note about CSC's EPS: The earnings growth looks weak, with EPS growing by -707.17% over the last year. This is considerably weaker than competitors like Rackspace Hosting, Inc. (EPS growth over the last year at 34.83%) and Accenture plc (EPS growth over the last year at 13.20%).

*EPS and FCF data sourced from Yahoo! Finance. All other data from Finviz.

Source: 3 Technology Stocks Undervalued By Free Cash Flow And EPS Trends