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Although an investor evaluates the demand for services provided by the company, and possibility of cutbacks by clients, a stockholder also feels comfortable in knowing that the company has a solid cash position after payments on debt. Here levered free cash flow plays an important role in paying for dividends and further expansion of the business.

To create the list below we looked at service stocks 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.

We continued our analysis by looking at the financial statements of all qualifying companies for those with encouraging sales trends.

We screened for names seeing faster growth in revenue than accounts receivable year-over-year, as well as accounts receivable comprising a smaller portion of current assets over the same time period. Since accounts receivable is the portion of revenue not yet received, and there is no guarantee the money will ever be received, the smaller the portion of revenue made up of receivables, the healthier the company's revenue.

Our analysis of the financials left us with 5 companies on our list.

Interactive Chart: Press Play to compare changes in 1-year return for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

Use the list below as a starting point for your analysis:

1. AMC Networks Inc. (NASDAQ:AMCX): Operates various cable televisions' brands delivering content to audiences and a platform to distributors and advertisers in the United States and internationally.

  • Market cap at $4.51B, most recent closing price at $62.31.
  • Levered free cash flow at $1.00B vs. enterprise value at $6.02B (implies a LFCF/EV ratio at 16.61%).
  • Revenue grew by 8.19% during the most recent quarter ($366.71M vs. $338.96M y/y). Accounts receivable grew by 5.18% during the same time period ($307.48M vs. $292.35M y/y). Receivables, as a percentage of current assets, decreased from 33.6% to 22.83% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • Other good news: AMCX has a higher than average projected earnings growth rate over the next 5 years (21.0%). This is higher than the likes of Viacom, Inc. (projected EPS growth over next 5 years at 14.13%) and Time Warner Cable Inc. (projected EPS growth over next 5 years at 13.04%).

2. Brown Shoe Co. Inc. (NYSE:BWS): Operates as a footwear retailer and wholesaler primarily in the in the United States, Canada, China, and Guam.

  • Market cap at $706.4M, most recent closing price at $16.47.
  • Levered free cash flow at $139.91M vs. enterprise value at $949.14M (implies a LFCF/EV ratio at 14.74%).
  • Revenue grew by 2.57% during the most recent quarter ($732.17M vs. $713.79M y/y). Accounts receivable grew by -11.04% during the same time period ($138.56M vs. $155.75M y/y). Receivables, as a percentage of current assets, decreased from 19.21% to 18.39% during the most recent quarter (comparing 13 weeks ending 2012-10-27 to 13 weeks ending 2011-10-29).
  • Keep in mind when comparing valuation ratios to industry averages, Brown Shoe Co. looks expensive. The stock's Price / Free Cash Flow ratio stands at 6.13, much higher than Cencosud S.A. (P/FCF ratio at 0) and PetSmart, Inc. (P/FCF ratio at 0).

3. Companhia Brasileira de Distribuicao (NYSE:CBD): Operates as a retailer of food products, clothing, home appliances, and other products through its chain of hypermarkets, supermarkets, specialized and department stores, convenience stores, and the Internet in Brazil.

  • Market cap at $13.63B, most recent closing price at $51.75.
  • Levered free cash flow at $1.94B vs. enterprise value at $15.82B (implies a LFCF/EV ratio at 12.26%).
  • Revenue grew by 9.08% during the most recent quarter ($14,584.46M vs. $13,370.49M y/y). Accounts receivable grew by -34.78% during the same time period ($4,404.78M vs. $6,753.67M y/y). Receivables, as a percentage of current assets, decreased from 39.09% to 25.53% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • More undervaluation to consider: Based on conventional valuation ratios, Companhia Brasileira de Distribuicao looks cheap relative to competitors. The stock's PEG ratio stands at 1.41, while its Price/Cash ratio stands at 3.92. Even on a Price to Free Cash Flow basis the stock looks cheap, with a ratio of 7.31, compared to Safeway Inc. (P/FCF ratio at 13.03) and The Kroger Co. (P/FCF ratio at 33.71).

4. Consolidated Graphics, Inc. (NYSE:CGX): Provides general commercial printing and print-related services primarily in the United States and Canada.

  • Market cap at $383.26M, most recent closing price at $39.84.
  • Levered free cash flow at $55.12M vs. enterprise value at $538.47M (implies a LFCF/EV ratio at 10.24%).
  • Revenue grew by 4.01% during the most recent quarter ($295.28M vs. $283.89M y/y). Accounts receivable grew by -4.75% during the same time period ($181.51M vs. $190.56M y/y). Receivables, as a percentage of current assets, decreased from 68.85% to 66.8% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • Investors should be aware that short sellers think there's more downside to the stock, especially when comparing short float to industry averages. CGX short float stands at 7.87%, which is equivalent to 11.86 days of average trading volume.

5. Etablissements Delhaize Freres et Cie Le Lion S.A. (NYSE:DEG): Operates food supermarkets in North America, Europe, and southeast Asia.

  • Market cap at $5.54B, most recent closing price at $54.34.
  • Levered free cash flow at $891.89M vs. enterprise value at $8.22B (implies a LFCF/EV ratio at 10.85%).
  • Revenue grew by 2.29% during the most recent quarter ($5,763M vs. $5,634M y/y). Accounts receivable grew by -4.67% during the same time period ($775M vs. $813M y/y). Receivables, as a percentage of current assets, decreased from 25.94% to 24.08% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • Warning, DEG has a lower than average projected earnings growth rate over the next 5 years (-0.30%). This is significantly below the analyst projections for Companhia Brasileira de Distribuicao mentioned earlier (projected EPS growth over next 5 years at 18.70%) and Whole Foods Market, Inc. (projected EPS growth over next 5 years at 17.73%).

*Price and FCF data sourced from Yahoo! Finance, all other data sourced from Finviz.

Source: 5 Undervalued Services Stocks With Encouraging Sales Trends