Stocks With Low Price to Free Cash Flow: Price to free cash flow is a common method of estimating whether a company is valued too high or low. The metric is used because it helps to understand a company’s assets, liquidity, and revenue. Price to free cash flow can be manipulated on financial statements by preserving cash or putting off purchases, but it’s still a good measure of how a company is doing.
A low price to free cash flow suggests the company’s market cap is low relative to the free cash flow it’s spitting off. So, what are some stocks with low price to free cash flow to consider?
This guide will breakdown why free cash flow is important and how to evaluate the price comparatively. We’ll then dive into which five stocks that have low P/FCF ratios. Let’s get started by describing what a good free cash flow is.
What Is a Good Price to Free Cash Flow?
If you’re looking for a company with a good price to free cash flow, you want to look for anything under 15. A price to free to free cash flow under 15 means the company is trading for a market capitalization that’s less than 15 times the free cash flow it generated over the past 12 months.
These are rolling 12-month periods, and that 15 number is a good rule of thumb. Higher ratios might suggest the market capitalization is lofty relative to the free cash flow spun off by the company.
In the short-term the price of a stock is a voting machine, meaning the dollars buying combat the dollars selling to arrive at an agreed upon level. Over the long-term it’s a weighing machine, meaning that the flow of dollars buying or selling is not what determines valuation in the end but rather the company’s fundamentals.
If the company has exceptional financials, the market’s voting machine will catch up to it in the end. And vice versa. A poor company can only fly so high for so long. Eventually it will be punished.
Do You Want a High or Low Price to Free Cash Flow?
As alluded to above, a lower price to free cash flow is generally preferred. We said earlier that you want a price to free cash flow below 15, and that definitely hints at the answer. Generally, the lower a company’s price to free cash flow, the more fairly valued it is.
Companies with high prices to free cash flow could suggest that they’re trading at elevated, and even overvalued levels. There’s a premium multiplier involved, and that means share prices are relatively high compared to the lower free cash flow.
Because free cash flow is an indicator of success, it’s a plus to see it high. Dividing a market capitalization by a higher free cash flow leads to a lower number. That’s why you want a lower free cash flow – it’s because the company is trading at a low multiple of cash flows.
It’s clear that lots of free cash flow can make attractive investment opportunities, which begs the question:
What Company Has the Most Free Cash Flow?
Big S&P 500 companies and market leaders like Apple (AAPL), Microsoft (MSFT), and Berkshire Hathaway (BRK.B) have the high free cash flows. These companies are free cash flow monsters that use their big cache of money to accomplish their strategic goals.
Companies like Verizon (VZ), Walmart (WMT), and Pfizer (PFE) also have a high free cash flow. When sales are high and costs are in check, a company like Verizon or Walmart can post enormous levels of cash. After all, top line revenues are the source of all cash that a company makes, and cash is the lifeblood of any company.
But just because a company has high free cash flow doesn’t mean it has a great ratio. Many of these companies are trading for hefty valuations, so here are five stocks with low price to free cash flow levels.
1800 Flowers Price to Free Cash Flow Is Very Low
1-800-Flowers.com Inc (NASDAQ:FLWS) has a price to free cash flow of 2.2. This is astounding and puts the ecommerce gift giant at the top of the list. This $2 billion company is a floral and food gift delivery company that gets a big boost from holidays like Mother’s Day and Valentine’s Day.
And it grew during the pandemic, showing that even the coronavirus can’t stop us from buying gifts for our parents and spouses.
FLWS share price almost tripled over the past year, but it’s still a great value when measured by the price to free cash flow method. The company has an operating cash flow of $240.29 million and levered free cash flow of $152.37 million. That makes it an enticing opportunity based on this metric.
Kinross Gold P/FCF Ratio Is Rock Bottom
Kinross Gold Corporation (NYSE:KGC) is a Toronto, Canada-based gold and silver mining company founded in 1993. These days it has a price to free cash flow ratio of 2.9, putting it just above 1800 Flowers but still very low relative to the majority of companies trading on the market.
Its free cash flow numbers of $382.8 million and $1 billion in 2020 proves that precious metals are a source of enormous top line revenues. In fact, the price of gold and silver went up during the pandemic. This allowed Kinross Gold to grow its market cap by a factor more than two.
Still, KGC stock price has been historically volatile, so there’s no telling how much this nearly $10 billion company can grow from here.
A plus to Kinross investors is its 1.54 percent dividend yield. The odds are high that it will maintain sufficient liquidity to continue its dividend payout ratio, making it an attractive investment for income-oriented investors.
Tupperware Brands Is A Free Cash Flow Machine
Tupperware Brands Corporation (NYSE:TUP) has a price to free cash flow ratio of 4.9, which is very low relative to the market as a whole. This Orlando, Florida-based multi-level marketing company has long been a staple of some households. Only genuine Tupperware will do for some people, and they’re even considered collector’s items to some.
Of course, demand for Tupperware stock plummeted in the late 2010s, and it only just became popular again in the wake of the pandemic. This means that although today’s prices are higher than a year ago, they are still far short of the peaks experienced several years ago.
Buying Tupperware stock today could be a great idea if it can break up to a $3 billion valuation. Considering buzzy app Clubhouse is valued at $4 billion despite just barely being released in the Android store, this long-time kitchen brand should be a great buy at current prices.
Pitney Bowes Free Cash Flow Average Is Consistent
Pitney Bowes Inc (NYSE:PBI) is a Stamford, Connecticut-based tech company most well known for its postage meters and services. The company also has a price to free cash flow ratio of 9.8, making it an compelling investment based on this metric.
Like Tupperware Brands, it was on the decline heading into the pandemic and found a lifeline while other businesses failed. This could be an indication that an economic recovery could hurt its future prospects.
The company produces on average around $62 million in free cash flow through the years. That means it’s still raking in sales revenues while doing what it can to reign in operating expenses. And it’s not a buzzy name that attracts a ton of media headlines, so it fits the bill for conservative investors.
iRobot FCF Is Growing
iRobot Corporation (NASDAQ:IRBT) is a Bedford, Massachusetts-based consumer robot company. It was initially part of MIT’s artificial intelligence lab before spinning off into its own company selling robotic vacuums and more. And it has a price to free cash flow ratio of 10.1; iRobot is nearing the threshold of what’s considered an appealing price to free cash flow ratio.
However, it has record free cash flow in 2021 and that means it could be on a growth trajectory. Hold it long term, and you may benefit from this growth. Of course, you should do further due diligence and be wary of investing based on this value metric alone.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.