If you are currently a shareholder in Summit Materials Inc (NYSE:SUM), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, SUM is currently valued at US$1.7b. Today we will examine SUM’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.
What is Summit Materials’s cash yield?
Summit 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.
I will be analysing Summit Materials’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
The business reinvests all its cash profits as well as borrows more money, to maintain and grow the company. This leads to a negative FCF, as well as negative FCF yield, in which case is not a very useful measure.
Is Summit Materials’s yield sustainable?
Summit Materials’s FCF may be negative today, but is operating cash flows expected to improve in the future? Let’s examine the cash flow trend the company is anticipated to produce over time. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 65%, ramping up from its current levels of US$230m to US$380m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, SUM’s operating cash flow growth is expected to decline from a rate of 35% next year, to 22% in the following year. But the overall future outlook seems buoyant if SUM can maintain its levels of capital expenditure as well.
Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research Summit Materials to get a more holistic view of the company by looking at:
- Valuation: What is SUM 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 SUM 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 Summit 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.
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.