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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About the Author

The Acquirer's Multiple
The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is 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–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”