HD Supply Holdings Inc (NASDAQ:HDS) 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. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through HDS’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
What is HD Supply Holdings’s cash yield?
Free cash flow (FCF) is the amount of cash HD Supply Holdings has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.
There are two methods I will use to evaluate the quality of HD Supply Holdings’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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, HD Supply Holdings also generates a positive free cash flow. However, the yield of 4.66% is not sufficient to compensate for the level of risk investors are taking on. This is because HD Supply Holdings’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is HD Supply Holdings’s yield sustainable?
Can HDS 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. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 44.93%, ramping up from its current levels of US$469.00m to US$679.73m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, HDS’s operating cash flow growth is expected to decline from a rate of 29.44% in the upcoming year, to 8.17% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock HD Supply Holdings as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Now you know to keep cash flows in mind, I recommend you continue to research HD Supply Holdings to get a more holistic view of the company by looking at:
- Valuation: What is HDS 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 HDS 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 HD Supply Holdings’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 email@example.com.