Stocks

Undervalued Quarterhill Inc (QTRH) FCF/EV Yield 15%

One of the cheapest stocks in our All Investable Stock Screener is Quarterhill Inc (NASDAQ:QTRH).

Quarterhill Inc (Quarterhill), formerly Wi-LAN Inc, is a Canada-based investment holding company focused on growing its business by acquiring technology companies in the Industrial Internet of Things (IIoT) across multiple verticals.

A quick look at Quarterhill’s share price history over the past twelve months shows that the price is up 9.6%, but here’s why the company remains undervalued.

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The following data is from the company’s latest financial statements, dated September 2017.

The company’s latest balance sheet shows that Quarterhill has $41 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has $9 Million in short-term debt and capital leases, and $1 Million in long-term debt. Therefore, Quarterhill has a net cash position of $31 Million (cash minus debt).

If we consider that Quarterhill currently has a market cap of $216 Million, when we subtract the net cash totaling $31 Million that equates to an Enterprise Value of $185 Million.

If we move over to the company’s latest income statements we can see that Quarterhill has $52 Million* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 3.55, or 3.55 times operating earnings. That places Quarterhill squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Quarterhill generated trailing twelve month operating cash flow of $28.3 Million and had $0.3 Million in Capex. That equates to $28 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 15%.

In terms of Quarterhill’s annualized Return on Equity (ROE) for the quarter ending September 2017. A quick calculation shows that the company had $239 Million in equity for the quarter ending June 2017 and $268 Million for the quarter ending September 2017. If we divide that number by two we get $253 Million. If we consider that the company has $31 Million (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending September 2017 of 12%.

In summary, Quarterhill is trading on a P/E of 7, which is considerably lower than its 5Y average of 54**, and an Acquirer’s Multiple of 3.55, or 3.55 times operating earnings. The company has a strong balance sheet, with a net cash position of $31 Million and a cash-debt ratio of 4x. Quarterhill has a FCF/EV Yield of 15% (ttm) and an annualized Return on Equity (ROE) for the quarter ending September 2017 of 12% (ttm). The company also provides a trailing dividend yield of 2.16%**. All of which indicates that the company remains undervalued despite the 9.6% gain in the past twelve months.

(**Source: Morningstar)

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From January 2, 1999 to November 2017 The All Investable Stock Screener generated a total return of 6,765 percent, or a compound growth rate (CAGR) of 25.0 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 321 percent, or 6.4 percent compound.