If you are currently a shareholder in Eagle Materials Inc. (NYSE:EXP), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I’ve analysed below, the health and outlook of EXP’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.
What is free cash flow?
Eagle Materials generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
The two ways to assess whether Eagle Materials’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
Eagle Materials’s yield of 5.67% 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 Eagle Materials is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
What’s the cash flow outlook for Eagle Materials?
Can EXP 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. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 15%, ramping up from its current levels of US$357m to US$411m in three years’ time. Furthermore, breaking down growth into a year on year basis, EXP is able to increase its growth rate each year, from 3.8% in the upcoming year, to 7.1% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
High operating cash flow growth is a positive indication for Eagle Materials’s future, which means it may be able to sustain the current cash yield. However, if you factor in the higher risk of holding just Eagle Materials compared to the well-diversified market index, the stock doesn’t seem as appealing. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Eagle Materials to get a more holistic view of the company by looking at:
- Valuation: What is EXP 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 EXP 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 Eagle Materials’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.
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