If you are currently a shareholder in Stamps.com Inc. (NASDAQ:STMP), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, Stamps.com is currently valued at US$2.8b. I’ve analysed below, the health and outlook of Stamps.com’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
What is Stamps.com’s cash yield?
Stamps.com’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Stamps.com to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Stamps.com’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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
Although, Stamps.com generate sufficient cash from its operational activities, its FCF yield of 5.09% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
Does Stamps.com have a favourable cash flow trend?Can Stamps.com improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next few years, a double-digit growth in operating cash of 24% is expected. The future seems buoyant if Stamps.com can maintain its levels of capital expenditure as well. Below is a table of Stamps.com’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year|
|Operating Cash Flow (OCF)||US$209m||US$235m||US$259m|
|OCF Growth Year-On-Year||13%||9.8%|
|OCF Growth From Current Year||24%|
The yield you receive on Stamps.com is in-line with that of holding the broader market index. However, if you factor in the higher risk of holding just Stamps.com compared to the well-diversified market index, the stock doesn’t seem as appealing. Now you know to keep cash flows in mind, I recommend you continue to research Stamps.com to get a more holistic view of the company by looking at:
- Valuation: What is STMP 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 STMP 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 Stamps.com’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 firstname.lastname@example.org.