HD Supply Holdings Inc (NASDAQ:HDS) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. Today we will examine HD Supply Holdings’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.
What is HD Supply Holdings’s cash yield?
HD Supply Holdings 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.
I will be analysing HD Supply Holdings’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
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
HD Supply Holdings’s yield of 5.65% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock HD Supply Holdings is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Is HD Supply Holdings’s yield sustainable?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 HD Supply Holdings’s expected operating cash flows. In the next couple of years, a double-digit growth in operating cash of 40% is expected. The future seems buoyant if HD Supply Holdings can maintain its levels of capital expenditure as well. Below is a table of HD Supply Holdings’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)||US$499m||US$620m||US$665m||US$700m|
|OCF Growth Year-On-Year||24%||7.3%||5.2%|
|OCF Growth From Current Year||33%||40%|
The yield you receive on HD Supply Holdings is in-line with that of holding the broader market index. However, you are taking on more risk by holding a single-stock rather than the well-diversified market index. This means, in terms of risk and return, it’s not the best deal. Now you know to keep cash flows in mind, I recommend you continue to research HD Supply Holdings to get a more holistic view of the company by looking at:
- Valuation: What is HDS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HDS is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on HD Supply Holdings’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.