Two important questions to ask before you buy Fisher & Paykel Healthcare Corporation Limited (NZSE:FPH) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the healthcare equipment industry, FPH is currently valued at NZD$7.33B. Today we will examine FPH’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you. View our latest analysis for Fisher & Paykel Healthcare
What is FPH’s cash yield?
FPH generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short. The two ways to assess whether FPH’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Along with a positive operating cash flow, FPH also generates a positive free cash flow. However, the yield of 1.37% is not sufficient to compensate for the level of risk investors are taking on. This is because FPH’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does FPH have a favourable cash flow trend?Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at FPH’s expected operating cash flows. In the next couple of years, a double-digit growth in operating cash of 53.88% is expected. The future seems buoyant if FPH can maintain its levels of capital expenditure as well. Below is a table of FPH’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year||+3 year|
|Operating Cash Flow (OCF)||$194M||$213M||$248M||$298M|
|OCF Growth Year-On-Year||10.04%||16.20%||20.35%|
|OCF Growth From Current Year||27.86%||53.88%|
What this means for you:
Are you a shareholder? FPH’s low yield relative to the market index means you are taking on more risk holding the single-stock FPH as opposed to the diversified market portfolio, and being compensated for less. However, the high growth in operating cash flow may change the tides in the future. I suggest re-assessing your original investment thesis for the stock to determine whether anything fundamental has changed.
Are you a potential investor? Given a low free cash flow yield, on the basis of cash, FPH becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. If FPH has been on your watchlist for a while, there is more research to be done! I recommend considering other fundamentals such as its balance sheet health and valuation as part of your due diligence.
So, what is FPH actually worth? At the share price of $12.86, find out whether it is currently undervalued at a glance in our FREE easy-to-understand infographics report. If you’re curious about other attractive investments, explore our list of high-growth and undervalued stocks here.