3 Companies Undervalued Based on Cash Flow

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 |  Includes: AMED, ARO, TSRA
by: Jae Jun

I always look forward to the various Forbes Best 100 lists that are published each year. Although a little late, I’ve gone through the 2009 100 best mid cap companies ranked by Forbes hoping to find and build a list of well run companies.

There is no 2010 version as Forbes has either stopped publishing the mid cap list or they must have forgotten about it. Hopefully somebody that works there will read this and get things rolling for the 2011 list.

Of the 100 mid cap companies, eight companies have been bought out within 1.5 years since this list was created, 62 made it to the valuation stage while the other 30 were dismissed. I found it too hard to value or the company that made it onto the list due to one excellent year of operations. I looked for consistency in this list of companies.

Out of the 62 companies that were valued, the process was done quickly by looking at the cash flow, margins, CROIC and the other investing metrics I consider important. Only 3 companies came up as being undervalued based on DCF, Graham formula and EPV.

  1. Aeropostale (NYSE:ARO)

  2. Amedisys (NASDAQ:AMED)

  3. Tessera Technologies (NASDAQ:TSRA)

Aeropostale (ARO)

Aeropostale is a retailer of teenage apparel priced lower than Abercombie and Fitch (NYSE:ANF) and American Eagle (NYSE:AEO).

Although the price of its products are below that of the competitors, the business operation is anything but. The year 2010 was another great year of operations for the company. But seeing as how the increase in revenues and cash was due to cost reduction, I applied more “normalized” figures in my calculations. Before getting into the final valuation, here are some numbers that ARO has produced.

Over the past five years, the median owner earnings growth is 36.8%, CROIC is 22.1%, FCF/Sales is 5.7%. Compare this with the 10 year median of 0%, 13.5% and 4.3% and you can see that over the past five years, ARO has done a great job in improving the business.

  • DCF: $27.53
  • Graham: $34.43

  • EPV: $29.02

Amedisys (AMED)

Amedisys has shown up on my value screens as well as the magic formula investing screen many times.

The company provides home health services and has been hit due to the uncertainty of the Medicare reimbursement under the new healthcare reform pushed by President Obama. What is certain is that until now, AMED has produced amazing amounts of free cash flow.

Margins have decreased every year since 2003 when it was at a peak of 61% to 49.9% in 2010.

Median CROIC is 8.7%, FCF/Sales is 6.3%, wiwth ROA and ROE coming out to 8.9% and 15% respectively.

  • DCF: $44.92

  • Graham: $65.07

  • EPV: $44.60

Tessera Technologies (TSRA)

Tessera develops and licenses technology in micro-electronics and imaging and optics. Like AMED, TSRA has shown up plenty of times in my screens over the past year, but because the micro-electronic industry is not a particular favorite of mine, it has usually been left in the “too hard” pile.

However, with the current valuation and the lack of love it is receiving from Wall Street, it may be worthwhile to start reading the reports.

TSRA numbers are not consistent and there are wild fluctuations all way from the top of the financial statement to the bottom. A lot of expenses were used in litigation cases, but now that TSRA has won the case, the numbers should stabilize.

What I like about TSRA is that for a technology company it has been able to increase tangible book value every single year with CAGR growth of 22%.

  • DCF: $27.00

  • Graham: $26.01

  • EPV: $22.18

List of Forbes 100 Best Mid Caps in America

Disclosure: Long ARO at the time of writing