The search for undervalued companies with solid basic business foundations is a central idea of value investing. This approach involves finding stocks trading for less than their actual worth, often using a systematic filtering process to find companies that are not only inexpensive, but also financially sound and profitable. One such filter, which selects for stocks with high valuation ratings while keeping acceptable scores in growth, profitability, and financial soundness, has recently identified a noteworthy candidate in the entertainment industry.
Valuation Metrics
A main objective for value investors is to find a large difference between a company's market price and its determined actual value, providing what Benjamin Graham called a "margin of safety." The fundamental review for NETFLIX INC (NASDAQ:NFLX) shows a valuation profile that is very strong. The stock gets a top valuation rating, meaning it seems very inexpensive relative to both its industry and the wider market.
- Price-to-Earnings (P/E) Ratio: NFLX's P/E ratio of 4.36 is much lower than the industry average of 39.13 and the S&P 500 average of 25.45. This indicates investors are paying much less for each dollar of earnings compared to similar companies.
- Forward P/E Ratio: The forward-looking P/E ratio of 3.16 further supports this inexpensive valuation, performing better than 100% of its industry rivals.
- Enterprise Value to EBITDA & Price-to-Free Cash Flow: Both of these important valuation measures also show NFLX is valued more inexpensively than over 93% of the companies in its industry, pointing to a possible separation between its market price and the cash-producing capacity of its business.
Financial Health
A sound financial base is essential for value investors, as it lowers the danger of a "value trap"—a company that is inexpensive for a cause, such as approaching financial trouble. Netflix shows very good financial health, receiving a high rating in this area. The company's ability to meet long-term debts is a specific positive, with an Altman-Z score of 3.57 showing no short-term bankruptcy danger and a debt-to-free-cash-flow ratio of only 1.61, meaning it could in theory pay off all its debt in under two years with its present cash flow. This financial steadiness offers a cushion for investors, matching well with the value investing rule of protecting capital.
Profitability Strength
An undervalued stock is much more appealing if it is part of a very profitable business. Value investors look for companies that are not only inexpensive but also able to produce high returns on capital. Netflix performs very well here, getting a top-tier profitability rating. Its return on invested capital (ROIC) of 24.41% is excellent, performing better than almost 99% of its industry counterparts. Also, both its profit margin (24.05%) and operating margin (29.14%) are in the highest group of the entertainment industry. These numbers verify that the company's low valuation is not a sign of weak earnings power, but instead a possible market error.
Growth Path
While pure value investing often concentrates on current numbers, continued growth is vital for making sure a company's actual value rises over time, finally pushing the stock price up. Netflix shows a good growth rating, mixing notable past performance with acceptable future projections. Over the last year, earnings per share increased by 35.48%, with revenue rising by 15.41%. Looking forward, analysts predict an average yearly EPS growth of 22.82%, showing that the company's notable enlargement is anticipated to persist. This mix of value and growth is especially powerful, as it hints the market may be underestimating a company that is still in a solid growth period.
The meeting of a deeply discounted valuation, top-tier profitability, sound financial health, and a good growth view makes Netflix a strong candidate for more study by investors using a value-focused plan. The company's profile indicates it may be underestimated by the market even though it has the basic strengths value investors usually look for.
For investors interested in finding other companies that match this profile, you can view the complete "Decent Value" screen here.
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Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The information presented should not be used as the sole basis for any investment decision. All investors should conduct their own independent research and consult with a qualified financial advisor before making any investment.
