A recent pullback saw the shares of TeleNav (NASDAQ:TNAV) correct around 20% from the 52 week high, starting early June 2011. On closer analysis, could this recent, much needed pullback - largely engineered by overall market sentiment in the broader market/indexes - offer a good buying opportunity for such progressive, cash rich companies as TNAV?
In my research, I look for stocks with a minimum market capitalization of $50m, which are trading above 60% of their 52 week low, and present a strong fundamental bias to the upside. Looking at TNAV clinically, revealed some very interesting (and compelling) metrics.
Firstly, a little info about the company: Headquartered in Sunnyvale, California, TeleNav, Inc. primarily offers location based services for consumers and enterprises in the U.S. and internationally, providing GPS Navigator, a voice guided, real time mobile navigation service, which delivers live traffic alerts, route planning, and updated points of interest.
The company offers GPS Navigator on a white label basis, such as Sprint (NYSE:S) navigation and AT&T (NYSE:T) navigator under the TeleNav brand. The company also provides enterprise-centric solutions such as mobile resource management solutions, which helps monitor and manage mobile workforces and assets by using its location based services platform to track job status and the location of workers, field assets, equipment, etc. The company also focuses increasingly on developing location based services for mobile phones, including location based mobile advertising, commerce, and social networking, a fast growth sector, requiring carefully managed products to develop niche advantages.
Focusing on fundamental metrics, what I look for as a core measure, before shortlisting any stock as potential play, is the "Free-Cash-Flow To Enterprise Value." In the case of TNAV, this is presently (largely due to the pullback) a significant (I am tempted to say "phenomenal") 30.69%.
This means that the cash-flow (true profit booked into the account - see next paragraph) is over 30% of the true value of the company. This is an enterprise where around $4.42 of its $14.43 stock price is "pure cash flow" generation.
Note, the free cash flow (FCF) metric is a more accurate measure of a companies earnings, as it reflects the true operational performance (generation of actual cash profits) of a business. This eliminates any potential misrepresented accounting, or dubious non-operational entries into the profit/loss statements.
The enterprise value (EV) metric is a more accurate representation of what a company is worth. Many investors simply take the market cap as a determination of a companies value. This is flawed, as it does not account for debt and cash the company may hold. A potential buyer would only pay the true worth of a business, which is the market capitalization PLUS debt (the acquirer would have to buy the debt), MINUS cash (the acquirer, once the company is purchased, also gains the cash reserves).
Hence, unlike the commonly observed P/E ratio (which is based on the very basic, and questionable market cap and earnings metrics), the FCF/EV ratio more accurately represents the amount of true earnings a company produces as a ratio (or percentage) of the true worth of the business.
In the case of TNAV, the current free-cash-flow generated is $119.37m, and the enterprise-value is $388.89m. Hence the FCF/EV ratio is 0.3069 (or 30.69%).
Additional positive fundamental metrics in favor of TNAV include a price-to-earnings-growth ratio of 1.34, zero debts on the balance sheet, over $210m in cash (on balance sheet), year-on-year sales growth over the last five years. Even if the sales drop, the most supportive metric in favor of the business remains the cash-flow-to-enterprise-value.
The stock is currently priced at $14.43 (pre-open Monday 13th June 2011), which is 210.3% above the 52 week low.
* Enterprise Value/Free-Cash-Flow Data Sourced From Yahoo Finance. Stock Price, Technical & Performance Analytics Sourced From Tradepilot.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.