Below is a list of two technology companies, based in Israel and Indonesia, currently being sold by hedge funds. They appear undervalued based on levered free cash flow/enterprise value ratios, but vary widely across other metrics.
To create the list we began with a screen of the foreign technology sector for stocks with bearish sentiment from institutional investors, with significant net institutional sales over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these companies to underperform in the future.
We then screened for companies that appear undervalued relative to their cash flows, indicated by high ratios of levered free cash flow/enterprise value. Levered free cash flow can be used to pay dividends, pay for expansion or finance growth opportunities by taking on debt.
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 were left with a list of two companies, detailed below with more financial data, particularly measures of valuation.
For an interactive version of this chart, click on the image below. One year returns sourced from Zacks Investment Research.
Do you think these stocks deserve to be sold off by institutional investors? Use the list below as a starting point for your own analysis.
- Market cap at $220.59M, most recent closing price at $5.31
- P/E: N/A; global industry average: 34.92
- Forward P/E: 27.84; global industry average: 27.26
- PEG: N/A; global industry average: 3.08
- Price-to-book ratio: 0.92; global industry average: 2.39
- Price-to-free cash flow ratio: 13.10; global industry average: 55.00
- Debt/Equity: 0.22, global industry average: 0.35
Net institutional sales in the current quarter at -1.8M shares, which represents about 8.47% of the company's float of 21.25M shares.
Levered free cash flow at $39.15M vs. enterprise value at $198.72M (implies a LFCF/EV ratio at 19.7%).
GILT has returned -7.45% since 4/15/13, and is one of the worst performing stocks in its industry. The stock is falling behind companies like ViaSat Inc. (VSAT) and ShoreTel, Inc. (SHOR), which returned 28.19% and 26.69% during the same time period.
The company's earnings growth looks weak, with EPS growing by -291.84% over the last year. This is considerably weaker than competitors like EchoStar Corp. (EPS growth over the last year at 5642.92%) and Comtech Telecommunications Corp. (EPS growth over the last year at -36.02%).
GILT has a low short float compared to industry averages, suggesting perhaps that short sellers see limited downside in the stock. The company's short float stands at 0.04%, much lower than ViaSat Inc. (short float at 8.97%, representing 18.26 days of trading volume) and Comtech Telecommunications Corp. (short float at 4.10%, representing 5.32 days of trading volume).
GILT released its most recent earnings report on 5/8/2013, and as The Motley Fool reports, reported revenue of $82.8 million which fell slightly below analyst expectations. Net margins and operating margins grew, as did revenue over the same quarter in the previous year. However, gross margin shrank by 90 basis points compared to the prior-year quarter. Motley Fool CAPS gives GILT a five out of five star rating, and 23 of 23 CAPS All-Star picks give the stock a green thumbs-up.
2. PT Telekomunikasi Indonesia Tbk. (TLK): More commonly known as Telkom Indonesia, a state-owned company that provides telecommunication and network services. The Government of the Republic of Indonesia is the majority shareholder, with the remaining shares traded on the Indonesia Stock Exchange, NYSE, LSE and publicly offered without listing in Japan.
- Market cap at $24.38B, most recent closing price at $48.98
- P/E: 17.59; ex-USA industry average: 14.04
- Forward P/E: N/A; ex-USA industry average: 11.12
- PEG: 2.02; ex-USA industry average: 4.24
- Price-to-book ratio: 4.04; ex-USA industry average: 2.03
- Price-to-free cash flow ratio: 20.33; ex-USA industry average: 51.77
- Debt/Equity: 0.41; ex-USA industry average: 1.03
Net institutional sales in the current quarter at -8.5M shares, which represents about 38.07% of the company's float of 22.33M shares.
Levered free cash flow at $2.39B vs. enterprise value at $22.93B (implies a LFCF/EV ratio at 10.42%).
TLK has performed in line with the rest of its industry since 4/15/13, returning 6.98% over the last month. This has been better than Telefonica, S.A. (TEF) and NTT DOCOMO, Inc. (DCM), but worse than major players like China Telecom Corp. Ltd. (CHA) and Nippon Telegraph & Telephone Corp. (NTT), which returned 13.60% and 13.23%, respectively.
When comparing valuation ratios across the industry, TLK looks more expensive than its bigger competitors. The stock's Price/Free Cash Flow ratio stands at 20.33, much higher than China Telecom Corp. Ltd. (P/FCF ratio at 17.5) and NTT DOCOMO, Inc. (P/FCF ratio at 0). The foreign telecom services industry average P/FCF ratio is 51.77.
The company has reported strong earnings growth over the last year, with EPS growing by 20.99%, higher than larger competitors like NTT DOCOMO, Inc. (EPS growth over the last year at -5.17%) and China Telecom Corp. Ltd. (EPS growth over the last year at -9.55%).
TheStreet currently rates TLK as a buy, despite recent dips in price and low growth in net income. They cite solid overall price performance, ROE and acceptable levels of debt as reasons for a positive outlook on the stock.
The Jakarta Post reports that TLK is leading an initiative to increase broadband connectivity across Indonesia, via partnerships with big names in IT including Intel and Cisco. As of this month, there were approximately 5 million broadband subscriptions in the country, of which TLK accounts for 2.3 million. The goal is to increase the number of connections to 20 million before 2016. This would represent 30% of Indonesian households, up from 3% in 2012.
*Levered free cash flow data sourced from Yahoo! Finance, institutional data sourced from Fidelity, all other data sourced from Finviz.