In the never-ending search for potentially undervalued stocks, one indicator is the ratio levered free cash flow/enterprise value. Companies with higher ratios appear more undervalued relative to their levered free cash flows.
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 towards the takeover price.
We ran a screen on US-traded stocks of companies based in China for those with relatively high ratios of levered free cash flow/enterprise value, possibly indicating that they are undervalued.
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.
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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.
Do you think the market is undervaluing these companies? Use this list as a starting point for your own analysis.
List sorted by levered free cash flow/enterprise value.
1. AsiaInfo-Linkage, Inc. (ASIA): Provides telecommunications software solutions and information technology (IT) products and services to telecommunications carriers and other enterprises in the People's Republic of China. Market cap of $494.23M. Levered free cash flow/enterprise value at 18.96% (levered free cash flow at $47.75M and enterprise value at $251.80M). The stock is a short squeeze candidate, with a short float at 25.47% (equivalent to 10.33 days of average volume). It's been a rough couple of days for the stock, losing 18.7% over the last week.
2. Sohu.com Inc. (SOHU): Engages in the brand advertising, online gaming, sponsored search, and wireless businesses in China. Market cap of $1.78B. Levered free cash flow/enterprise value at 16.92% (levered free cash flow at $164.86M and enterprise value at $974.09M). It's been a rough couple of days for the stock, losing 6.77% over the last week.
3. Guangshen Railway Co. Ltd. (GSH): Provides passenger and freight transportation services on the Shenzhen-Guangzhou-Pingshi railway in the People's Republic of China. Market cap of $2.41B. Levered free cash flow/enterprise value at 16.18% (levered free cash flow at $346.21M and enterprise value at $2.14B). Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 4.07%, current ratio at 1.8, and quick ratio at 1.71. The stock has lost 13.73% over the last year.
4. China XD Plastics Company Ltd. (CXDC): Rubber & Plastics Industry. Market cap of $240.03M. Levered free cash flow/enterprise value at 15.69% (levered free cash flow at $17.90M and enterprise value at $114.05M). The stock has lost 0.98% over the last year.
5. China Hydroelectric Corporation (CHC): Engages in the acquisition, ownership, development, construction, operation, and financing of hydroelectric power projects in the People's Republic of China. Market cap of $53.99M. Levered free cash flow/enterprise value at 13.34% (levered free cash flow at $61.73M and enterprise value at $462.58M). It's been a rough couple of days for the stock, losing 21.26% over the last week.
6. China Eastern Airlines Corp. Ltd. (CEA): Operates in civil aviation industry. Market cap of $3.87B. Levered free cash flow/enterprise value at 12.35% (levered free cash flow at $758.04M and enterprise value at $6.14B). This is a risky stock that is significantly more volatile than the overall market (beta = 2.28). The stock has lost 27.48% over the last year.
*Levered free cash flow and enterprise value 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.
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