There are a lot of problems a company can overcome when the money’s coming in. In many cases, even companies with troubling debt loads or cringe-worthy balance sheets could have potential in the long term provided that they continue to bring in a healthy revenue stream. As such, this week’s Small Cap Focus highlights companies that have healthy margins and strong cash flow.
In this case, the following criteria were focused on: Price-to-free cash flow ratio (or P/FCF), which measures the price of a stock in relation to its operating cash flow minus capital expenditures. Also taken into consideration was gross margin, a measurement of the percentage of a company’s revenue after removing the cost of goods sold; and operating margin, which is a company’s operating income divided by its total sales and can be used to measure the percentage of a company’s total sales that is getting turned into income for the company.
In short, investors can see how much cash is coming in through P/FCF, and what portion of that cash is actual profit through gross and operating margins. Companies that have a lot of cash coming in, and are keeping a relatively large portion of that cash, will most likely have greater flexibility in spending on developing new products and revenue streams and should be able to handle shifts in the market better than companies operating with narrow margin or relatively little cash flow.
DepoMed (DEPO)
P/FCF: 5.03
Gross Margin: 95.72 percent
Operating Margin: 60.88 percent
DepoMed is a pharmaceutical company specializing in orally delivered drugs, including Gralise for management of postherpetic neuralgia. Pharmaceutical companies can experience boom and bust times depending on the drugs they have in development, but DepoMed offers up ample reasons for investors to give it serious consideration.
Bridgepoint Education (BPI)
P/FCF: 7.12
Gross Margin: 73.25 percent
Operating Margin: 31.30 percent
Bridgepoint is a for-profit education company offering degrees both online and on traditional campuses with 1,345 courses, 71 different degree programs, and 134 specializations available. Bridgepoint has reason to look towards a sunny future. Along with strong P/FCF and gross and operating margins, the company’s also projecting strong earnings growth over the next five years.
Dice Holdings (DHX)
P/FCF: 10.29
Gross Margin: 92.73 percent
Operating Margin: 30.67 percent
Dice Holdings makes specialized job websites for specific careers, offering a service to niche professional communities. Dice has fallen over the last year, losing over half its share value since the start of last May. However, Dice might be able to bounce back, given its strong margins, solid P/FCF, and projections for earnings growth over the next five years.
National CineMedia (NCMI)
P/FCF: 10.04
Gross Margin: 69.83 percent
Operating Margin: 43.97 percent
National CineMedia makes in-theater digital entertainment and advertising. The company projects low growth for the future, potentially related to the shifting nature of entertainment revenues, but there’s still some reason to like the company. Regardless of where things go in the future, National CineMedia is bringing in cash and shows very healthy margins.
Sinclair Broadcasting Group (SBGI)
P/FCF: 11.05
Gross Margin: 66.10 percent
Operating Margin: 29.08 percent
Sinclair is a diversified television broadcasting company that owns 74 stations in 45 markets and reaches 26.3 percent of US television households. While Sinclair’s long-term health may suffer from the flow of television viewers to the internet, that doesn’t necessarily mean the company is without potential. The company has strong margins, a healthy P/FCF margin, and appears to be priced well given its revenue sources.
*Data from finviz.com
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