Coherent, Inc. (NASDAQ:COHR) 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. This difference directly flows down to how much the stock is worth. Operating in the industry, COHR is currently valued at US$2.7b. Today we will examine COHR’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.
Is Coherent generating enough cash?
Coherent’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 Coherent to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Coherent’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
Coherent’s yield of 5.57% 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 Coherent is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Does Coherent 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 COHR’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 75%, ramping up from its current levels of US$236m to US$414m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, COHR’s operating cash flow growth is expected to decline from a rate of 49% in the upcoming year, to 20% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Coherent’s positive operating cash flow is encouraging, and its yield is relatively similar to the market index. 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! Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Coherent to get a better picture of the company by looking at:
- Valuation: What is COHR 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 COHR 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 Coherent’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.