Cabot Microelectronics Corporation’s (NASDAQ:CCMP) Most Important Factor To Consider
Two important questions to ask before you buy Cabot Microelectronics Corporation (NASDAQ:CCMP) 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 semiconductor equipment industry, CCMP is currently valued at US$2.4b. Today we will examine CCMP’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 Cabot Microelectronics
Is Cabot Microelectronics generating enough cash?
Cabot Microelectronics’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 Cabot Microelectronics to continue to grow, or at least, maintain its current operations.
I will be analysing Cabot Microelectronics’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
Although, Cabot Microelectronics generate sufficient cash from its operational activities, its FCF yield of 5.55% 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 Cabot Microelectronics have a favourable cash flow trend?
Does CCMP’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 23%, ramping up from its current levels of US$155m to US$191m in two years’ time. Furthermore, breaking down growth into a year on year basis, CCMP is able to increase its growth rate each year, from 10% next year, to 11% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
High operating cash flow growth is a positive indication for Cabot Microelectronics’s future, which means it may be able to sustain the current cash yield. But, in saying this, investors are taking on more risk by buying one single stock as opposed to a diversified market portfolio, but they are being compensated at the same level. Not the best deal! Now you know to keep cash flows in mind, I recommend you continue to research Cabot Microelectronics to get a more holistic view of the company by looking at:
Valuation: What is CCMP 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 CCMP 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 Cabot Microelectronics’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 editorial-team@simplywallst.com.
