Staffing & Employment Services company Sea is standing out today, surging to $66.52 and marking a 4.4% change. In comparison the S&P 500 moved only 0.0%. SE is -29.4% below its average analyst target price of $94.22, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Sea has underperfomed the S&P 500 by 2876.0%, moving -1750.4%.
Sea Limited, together with its subsidiaries, engages in the digital entertainment, e-commerce, and digital financial service businesses in Southeast Asia, Latin America, rest of Asia, and internationally. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
Sea does not release its trailing 12 month P/E ratio since its earnings per share of $-1.76 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for SE of -37.8. Based on the company's positive earnings guidance of $2.44, the stock has a forward P/E ratio of 27.3.
As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.33, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Sea's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.3. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing SE's growth potential .
To better understand the strength of Sea's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-04-22 | 9,955,190 | -5,478,795 | -15.9 | 46.63 |
| 2021-04-16 | 4,375,664 | -2,652,230 | -29.79 | 27.29 |
| 2020-04-14 | 2,175,378 | -1,496,152 | -40.97 | -37.53 |
| 2019-03-01 | 4,375,664 | -2,652,230 | -29.79 | n/a |
- Average operating margins: -29.1 %
- Average operating margins growth rate: 14.5 %
- Coefficient of variability (lower numbers indicate less volatility): 35.3 %
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Sea's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-04-22 | 208,649 | -806,556 | 1,015,205 | 11.42 |
| 2021-04-16 | 555,868 | -355,322 | 911,190 | 188.6 |
| 2020-04-14 | 69,865 | -245,862 | 315,727 | 199.4 |
| 2019-03-01 | -495,220 | -177,572 | -317,648 | n/a |
- Average free cash flow: $481.12 Million
- Average free cash flown growth rate: 43.1 %
- Coefficient of variability (the lower the better): 127.9 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, SE is in a position to do either -- which can encourage more investors to place their capital in the company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
Sea's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 6, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.12 as of the first quarter of 2023.
Sea is by most measures fairly valued because it has a negative P/E ratio, an elevated P/B ratio, and a pattern of improving cash flows with an upwards trend. The stock has mixed growth prospects because it has a a negative PEG ratio and consistently negative margins with a positive growth rate. We hope you enjoyed this overview of SE's fundamentals.
