This morning, online job giant SEEK Ltd [ASX:SEK] dropped more than 5%, to $16.9 per share.
What happened to cause the drop of 5%?
The $5.9 billion company released their full-year results for FY17.
Revenues were 9.1% higher, totalling $1.1 billion. However, because of higher operating expenses, profit for the year was down from $399 million to $362 million. Of total profits, only $340 million went to SEEK shareholders. The remainder was attributed to non-controlling parties.
On a more positive note, SEEK’s working capital position improved. They decrease short-term borrowings slightly, but also increased long-term borrowings.
While income dropped, SEEK increased dividends paid from $131 million to $146 million.
What now for SEEK?
While SEEK did experience a drop in profits, have investors oversold the job-advertising giant?
Over the past five years, SEEK has maintained a high return on equity, above 20%. They also have opportunity to grow in Asia and other parts of the globe.
More importantly, SEEK produces a ton of cash each year. The company has grown free cash flow from FY12–16 by an average of 25%.
If they could continue a similar growth pattern, even SEEK’s price-to-earnings ratio of 37-times looks cheap.
Here’s a basic discounted cash flow calculation for SEEK. We will estimate all future cash flow and the growth of this cash flow, discounting them back to present-day terms. With this information, we’ll have a better idea about whether SEEK is cheap or expensive.
Let’s assume SEEK can grow free cash flow, on average, by 15% for the next five years. For the five years after that, we’ll assume lower growth of, say, 10% each year. From then into perpetuity, let’s assume SEEK will grow free cash flow by 5% each year.
Using their latest free cash flow figure of around $204 million, and discounting at 10%, SEEK is potentially worth $7.1 billion, 20% above their $5.9 billion price tag.
Does this make SEEK a buy?
Not exactly. After estimating the true worth of a business, you need to consider your assumptions. Are they optimistic? What happens if an economic or industry downturn hits profitability, affecting free cash flows? These are things every investor needs to think about.
If you’re keen on finding companies with potentially huge growth prospects ahead like SEEK, check out these four small-caps.
Junior Analyst, Money Morning