2 stock picks with high free cash flow yield

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Investment thesis

  • I consider Meta Platforms (NASDAQ:META) and Under Armor (NYSE:UA, NYSE:UAA) to be attractive investments right now in terms of risk and reward, not least because of their high free cash flow yield.
  • Free current meta-platforms Cash flow yield [TTM] is 7.89%.
  • Under Armor currently has a free cash flow yield [TTM] of 14.56%.
  • My DCF models show that the Meta and Under Armor platforms are currently undervalued.
  • I rate both companies as a buy: I currently see them as attractive, especially given their valuation. My opinion is supported by the HQC scorecard, which ranks both companies as highly attractive in the Valuation and Expected Return categories.
  • However, due to the associated risk factors, I would recommend not overweighting Meta Platforms or Under Armor in your investment portfolio.

Metaplatforms

Along with Facebook, Instagram and WhatsApp, Meta Platforms connects people around the world. In my previous analysis on the company, I discussed in more detail its enormous profitability:

“Meta Platforms’ high EBIT margin of 33.41% is an expression of the company’s extremely strong market position in the interactive media and services industry. A return on equity of 25.48% shows that the company is effectively using its equity to generate revenue. »

Additionally, I explained that Meta Platforms managed to create its own ecosystem:

“The company has managed to build its own ecosystem through the integration of some of the most popular communication platforms in the world: Facebook, Instagram, Messenger and WhatsApp. Meta Platforms revealed in its 2Q22 report that Facebook alone averaged 1.97 billion daily active users in June 2022, demonstrating the huge global usage of just one of its platforms.

Valuation of Meta Platforms

In my DCF model, I assumed a revenue and EBIT growth rate of 5% for the company over the next 5 years. Also, I assumed a perpetual growth rate of 3% and used its current discount rate [WACC] of 7.75% and a tax rate of 16.7%. I used an EV/EBITDA multiple of 8.7x, which is the company’s last twelve months EV/EBITDA. The method calculates a fair value of $203.13. The current stock price is $165.28, which translates to an upside of 22.90%.

Meta Platforms’ P/E ratio is 17.21, or 31.88% below its 5-year average (25.26), providing an additional indicator that the company is currently undervalued.

The various valuation methods show that Meta Platforms is currently undervalued, confirming my investment thesis that you can currently invest in the company with a higher margin of safety.

under protection

In my detailed analysis on Under Armour, I pointed out that the company has found its niche in the sporting goods industry:

“Under Armor found its niche in the sporting goods industry by focusing primarily on American football. Additionally, when Under Armor started operations in 1996, the company focused on manufacturing apparel in the goal of improving the performance of athletes.Even today, Under Armor focuses on the performance apparel market niche.

In the same analysis, I also discussed Under Armor’s sponsorship deals with various athletes:

“In order to strengthen the brand image of the company, Under Armor has entered into sponsorship contracts with athletes from different sports. The biggest being with basketball player Stephen Curry in 2013 and American football quarterback Tom Brady, who signed in 2010. In addition, Under Armor has agreed to a large number of sponsorships with American college and university teams in order to to further strengthen its brand image.

The fact that Under Armor has found its niche in the sporting goods industry in combination with the endorsement deals it has with athletes, contributes to its competitive advantages over smaller companies with lower brand value. .

The Under Armor review

In my DCF model, I assumed a revenue growth rate and an EBIT growth rate of 3% over the next 5 years. Also, I assumed a perpetual growth rate of 3%. I used Under Armor’s current discount rate [WACC] of 8.75% and a tax rate of 8.2%. Additionally, I calculated with an EV/EBITDA multiple of 8.0x, which is the company’s trailing 12-month EV/EBITDA. The method calculates a fair value of $18.13 for the company. At the current share price, this translates to an increase of 106.2%.

Presentation: Metaplatforms and Under Armor

Metaplatforms

Under argrief

Sector

Communication Services

Consumer Discretionary

Industry

Interactive media and services

Clothing, accessories and luxury goods

Market capitalization

438.77B

3.87B

Employees

83,553

12,300

PER [FWD] Report

16.65

16.09

Revenue [TTM]

119.41B

5.68B

Operating result [TTM]

39.89B

524.82M

Revenue increase [FWD]

15.13%

12.55%

Turnover 3 years [CAGR]

24.02%

3.05%

5-year turnover [CAGR]

29.20%

3.29%

Gross margin

80.47%

50.36%

EBIT margin

33.41%

9.23%

Return on equity

25.48%

19.13%

Free Cash Flow Yield

7.89%

14.56%

Dividend yield

Source: Alpha Research

The high quality business [HQC] Scorecard

“The HQC Dashboard aims to help investors identify companies that are attractive long-term investments in terms of risk and reward.” Here you will find a detailed description of how the scorecard works.

Overview of HQC Scorecard Items

“In the graph below, you can find the individual items and weighting for each category in the HQC dashboard. A score between 0 and 5 is assigned (0 being the lowest score and 5 the highest) for each scorecard item. Additionally, you can see the conditions that must be met for each point of each scored item.”

HQC Dashboard

Source: The author

Meta-platforms according to the HQC dashboard

Meta-platforms according to the HQC dashboard

Source: The author

According to the HQC scorecard, Meta Platforms currently has an attractive overall risk and reward rating (76 out of 100 points).

The company is considered very attractive in the categories Profitability (100/100), Valuation (92/100), Financial solidity (81/100), Innovation (80/100) and Expected return (80/100).

In the Growth category (76/100), it is considered attractive. For Economic Moat (57/100), the company obtains a moderately attractive rating.

This rating according to the HQC dashboard reinforces my belief that Meta Platforms is currently a buy.

Under Armor according to HQC scorecard

Under Armor according to HQC scorecard

Source: The author

According to the HQC scorecard, Under Armor has an overall moderately attractive risk and reward rating, with 54 points out of 100. Two months ago, Under Amour received 56/100 points.

Under Armor is currently ranked as Very Attractive in the Expected Return (100/100) and Valuation (92/100) categories. For financial strength, it receives an attractive rating (72/100). The company’s attractive financial strength rating is particularly strong due to its high free cash flow yield (14.56%) as well as its high current ratio (2.30) and quick ratio (1.56). ).

For Profitability (50/100) and Growth (40/100), the company obtains a moderately attractive score.

In the Economic Moat category (21/100), Under Armor receives only an unattractive rating. This is the result of the company’s intense competition with companies like Nike (NYSE: NKE) and Adidas (OTCQX: ADDDF, OTCQX: ADDYY).

This rating reinforces my belief that the company is currently an attractive prospect, not least because of its attractive valuation. However, a moderately attractive overall rating underscores my view not to overweight the Under Armor position in an investment portfolio.

Risk factors

In my previous analysis on Meta Platforms, I discussed in more detail the potential risks attached to investing in the company:

“One of the biggest risk factors I see with an investment in Meta Platforms is that the company derives nearly 98% of its revenue from advertising on Facebook and Instagram. As such, the company is particularly dependent of its advertising revenue and even more than, for example, its competitor Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL).Alphabet derives around 80% of its revenue from advertising, as I have shown in my analysis on the The loss of marketers along with a reduction in marketing spend by customers would have a significant impact on the company’s business results and therefore lead to lower profit margins.

In my analysis on Under Armour, I highlighted that I consider the intense competition with Nike and Adidas to be one of the main risk factors:

“One of the biggest risk factors I see for Under Armor is that the apparel and footwear market is extremely competitive. Under Armor competes with Nike and Adidas, both of which have established strong brand image From my point of view, the existence of two strong competitors such as Nike and Adidas is the biggest risk factor for Under Armour.This intense competition may lead to Under Armour’s loss of market share and further may lead to a decrease in company revenue and profit margin.In addition, Under Armor competes with companies such as PUMA (OTCPK:PMMAF) and Lululemon Athletica (NASDAQ:LULU) as well as smaller and smaller companies. which may have local brands that are more regionally recognized than Under Armour.

Because of these risk factors, I would recommend not overweighting companies in your investment portfolio.

The essential

Meta-platforms currently high free cash flow yield [TTM] of 7.89% shows that the share price is no longer based on high growth expectations. It is also an indicator that you can currently invest in meta platforms with a higher margin of safety compared to previous years.

Under Armor Current Free Cash Flow Yield [TTM] of 14.56% can also be interpreted in such a way that expectations of high growth are no longer taken into account in its action.

As noted in the risk section of this review, I view Meta Platforms’ reliance on its advertising revenue from Facebook and Instagram as one of the key risk factors. When it comes to Under Armour, intense competition with major manufacturers Nike and Adidas is the biggest risk factor.

Due to the risk factors mentioned in this analysis, I recommend that you do not overweight Meta Platforms and Under Armor stocks in an investment portfolio; however, I consider both companies a buy: particularly given their current high yield on free cash flow.

James T. Quintero