Undervalued Ceragon Networks FCF/EV Yield 10%, ROE 14% – Small & Micro Cap Stock Screener

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One of the cheapest stocks in our Small & Micro Cap Stock Screener is Ceragon Networks Ltd (NASDAQ:CRNT).

Ceragon Networks Ltd (Ceragon) is a wireless backhaul specialist company providing wireless backhaul solutions that enable cellular operators and other wireless service providers to deliver voice and data services, enabling smart-phone applications.

A quick look at Ceragon’s share price history over the past twelve months shows that the price is down 22%, but here’s why the company is undervalued.

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

The company’s latest balance sheet shows that Ceragon has $34 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has $8 Million in short-term debt and no long-term debt. Therefore, Ceragon has a net cash position of $26 Million (cash minus debt).

If we consider that Ceragon currently has a market cap of $160 Million, when we subtract the net cash totaling $26 Million that equates to an Enterprise Value of $134 Million.

If we move over to the company’s latest income statements we can see that Ceragon has $22 Million* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 6.03, or 6.03 times operating earnings. That places Ceragon 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 Ceragon generated trailing twelve month operating cash flow of $21 Million and had $8 Million in Capex. That equates to $13 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 10%.

In terms of Ceragon’s annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $118 Million in equity for the quarter ending March 2017 and $124 Million for the quarter ending June 2017. If we divide that number by two we get $121 Million. If we consider that the company has $16.7 Million (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 14%.

It’s also worth considering that Ceragon currently has revenues of $333 Million (ttm), and while they’re not at record highs in the past five years, it’s important not to overlook the company’s operating income of $22 Million (ttm), net income of $16.7 Million (ttm), and free cash flow of $13 Million (ttm), which are all at five-year highs. Also notable are the significant reductions in capex, down from $15 Million in 2012 to just $8 Million (ttm).

In terms of Ceragon’s current valuation, the company is trading on a P/E of 9.9 compared to its 5Y average of 41.5**, a P/B of 1.3 compared to its 5Y average of 1.2**, and a P/S of 0.5 compared to its 5Y average of 0.4**. The company has a FCF/EV Yield of 10% (ttm) and an Acquirer’s Multiple of 6.03, or 6.03 times operating earnings. Ceragon also has an annualized Return on Equity (ROE) for the quarter ending June 2017 of 14% (ttm). All of which indicates that Ceragon is undervalued.

** Morningstar

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Over a full sixteen-and-a-half year period from January 2, 1999 to July 26, 2016., the Small & Micro Cap stock screener generated a total return of 3,284 percent, or a compound growth rate (CAGR) of 22.0 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 265 percent, or 5.7 percent compound.

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