Tutor Perini Corporation (NYSE:TPC): Cash Is King
If you are currently a shareholder in Tutor Perini Corporation (NYSE:TPC), 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, TPC is currently valued at US$901m. I’ve analysed below, the health and outlook of TPC’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.
View our latest analysis for Tutor Perini
What is free cash flow?
Free cash flow (FCF) is the amount of cash Tutor Perini 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.
The two ways to assess whether Tutor Perini’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
Along with a positive operating cash flow, Tutor Perini also generates a positive free cash flow. However, the yield of 1.52% is not sufficient to compensate for the level of risk investors are taking on. This is because Tutor Perini’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Tutor Perini’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 TPC’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 38%, ramping up from its current levels of US$127m to US$175m in two years’ time. Furthermore, breaking down growth into a year on year basis, TPC is able to increase its growth rate each year, from 13% next year, to 22% in the following year. The overall future outlook seems buoyant if TPC can maintain its levels of capital expenditure as well.
Next Steps:
Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. 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. 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 Tutor Perini to get a more holistic view of the company by looking at:
Valuation: What is TPC 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 TPC 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 Tutor Perini’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 editorial-team@simplywallst.com.
