6 Large-Cap Stocks Undervalued by Cash Flow and EPS Trends

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Includes: AFL, GE, LMCA, MRO, NEM, PRU
by: Kapitall

Measures of valuation are better in numbers – the more ratios indicating a stock is undervalued, the more sure you can be.

Here we report 6 large-cap stocks that appear undervalued by two measures. The first we used was 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, less cash. Higher ratios of Levered FCF / EV can indicate that the firm as a whole is underpriced.

These stocks have also not proportionately increased in price for a given increase in EPS estimate. Starting with a theoretical observation about P/E ratios that the P/E ratio is equal to some constant k, it follows that there should be a linear relationship between Price and Earnings per Share.

If there is a mismatch between growth rates in projected earnings per share values and price, a mis-pricing may have occurred, presenting an opportunity to value investors. (Although there is no reason to think that P/E should stay constant for a stock, this is simply a starting point for finding potentially undervalued opportunities.)

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.


Do you think these stocks should be trading higher? Use this list as a starting-off point for your own analysis.
List sorted by levered FCF/EV.

1. Prudential Financial, Inc. (NYSE:PRU): Life Insurance industry. Market cap at $29.47B. Enterprise value at $23.88B, vs. TTM levered free cash flow at $3.36B (i.e. LFCF/EV ratio at 14.07%). Over the last 30 days, analyst projected EPS has increased by 0.15% (from $6.65 to $6.66), while the price changed by -1.85% over the last 30 days (from $61.54 to $60.40).

2. General Electric Co. (NYSE:GE): Conglomerates industry. Market cap at $194.92B. Enterprise value at $581.35B, vs. TTM levered free cash flow at $80.64B (i.e. LFCF/EV ratio at 13.87%). Over the last 30 days, analyst projected EPS has increased by 0.74% (from $1.36 to $1.37), while the price changed by -3.77% over the last 30 days (from $19.10 to $18.38).

3. AFLAC Inc. (NYSE:AFL): Accident & Health Insurance industry. Market cap at $21.06B. Enterprise value at $22.34B, vs. TTM levered free cash flow at $3.09B (i.e. LFCF/EV ratio at 13.83%). Over the last 30 days, analyst projected EPS has increased by 0.16% (from $6.21 to $6.22), while the price changed by -8.49% over the last 30 days (from $49.23 to $45.05).

4. Liberty Starz Group (LSTZA): Broadcasting industry. Market cap at $51.63B. Enterprise value at $2.66B, vs. TTM levered free cash flow at $353.00M (i.e. LFCF/EV ratio at 13.27%). Over the last 30 days, analyst projected EPS has increased by 0.22% (from $4.55 to $4.56), while the price changed by -6.48% over the last 30 days (from $75.15 to $70.28).

5. Marathon Oil Corporation (NYSE:MRO): Oil & Gas Refining & Marketing industry. Market cap at $36.75B. Enterprise value at $39.99B, vs. TTM levered free cash flow at $3.73B (i.e. LFCF/EV ratio at 9.33%). Over the last 30 days, analyst projected EPS has increased by 1.43% (from $6.31 to $6.40), while the price changed by -0.50% over the last 30 days (from $51.88 to $51.62).

6. Newmont Mining Corp. (NYSE:NEM):
Gold industry. Market cap at $26.61B. Enterprise value at $26.47B, vs. TTM levered free cash flow at $2.16B (i.e. LFCF/EV ratio at 8.16%). Over the last 30 days, analyst projected EPS has increased by 0.24% (from $4.24 to $4.25), while the price changed by -2.23% over the last 30 days (from $55.21 to $53.98).

*Levered free cash flow, enterprise value, EPS and price data sourced from Yahoo! Finance, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.