One way to search for potentially undervalued firms is by using the ratio levered free cash flow/enterprise value. Companies with high ratios may be undervalued.
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. From this value we subtract cash holdings because, in the event of a takeover, that cash would be used toward the takeover price.
We used this ratio to screen for potentially undervalued stocks among the universe of healthcare stocks recently trading near their 52-week highs.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.
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Do you think these stocks will continue higher? Use this list as a starting point for your own analysis.
List sorted by levered free cash flow/enterprise value.
1. Medicis Pharmaceutical Corp. (MRX): Engages in the development and marketing of products for the treatment of dermatological and aesthetic conditions in the United States, Canada and Europe. Market cap of $2.26B. The stock is currently trading at 8.94% below its 52-week high. Levered free cash flow/enterprise value at 12.48% (levered free cash flow at $203.50M and enterprise value at $1.63B). The stock has gained 25.73% over the last year.
2. Unitedhealth Group, Inc. (NYSE:UNH): Provides healthcare services in the United States. Market cap of $51.67B. The stock is currently trading at 9.95% below its 52-week high. Levered free cash flow/enterprise value at 11.30% (levered free cash flow at $5.71B and enterprise value at $50.55B). Might be undervalued at current levels, with a PEG ratio at 0.92, and P/FCF ratio at 10.07. The stock has had a good month, gaining 10.47%.
3. Cephalon Inc. (NASDAQ:CEPH): Engages in the discovery, development and commercialization of products for central nervous system, inflammatory disease, pain and oncology therapeutic areas. Market cap of $6.32B. The stock is currently trading at 0.11% below its 52-week high. Levered free cash flow/enterprise value at 10.55% (levered free cash flow at $675.44M and enterprise value at $6.40B). The stock has gained 29.02% over the last year.
*Enterprise value and levered free cash flow 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.