If you are currently a shareholder in Matthews International Corporation (NASDAQ:MATW), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I’ve analysed below, the health and outlook of MATW’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.
Is Matthews International generating enough cash?
Matthews International’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 Matthews International to continue to grow, or at least, maintain its current operations.
I will be analysing Matthews International’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
Along with a positive operating cash flow, Matthews International also generates a positive free cash flow. However, the yield of 4.21% is not sufficient to compensate for the level of risk investors are taking on. This is because Matthews International’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Matthews International’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 MATW’s expected operating cash flows. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 50%, ramping up from its current levels of US$136m to US$205m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, MATW’s operating cash flow growth is expected to decline from a rate of 33% next year, to 13% in the following year. But the overall future outlook seems buoyant if MATW can maintain its levels of capital expenditure as well.
Given a low free cash flow yield, on the basis of cash, Matthews International becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, You should continue to research Matthews International to get a better picture of the company by looking at:
- Valuation: What is MATW 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 MATW 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 Matthews International’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.