Fortinet's price surge today will have many doubting analyst views on the stock. Ending the day at $71.15, FTNT has posted 27.5% gains, meaning that many investors are willing to buy the stock despite its average rating of hold. What factors might be motivating these buyers?
Over the last year, Fortinet shares have moved -6.6% while trading between the prices of $44.12 and $73.91. This represents a -23.9% difference compared to the S&P 500, which moved 17.3% over the last 52 weeks.
At its current price of $71.15 per share, FTNT has a trailing price to earnings (P/E) ratio of 42.1 based on its 12 month trailing earnings per share of $1.69. Considering its future earnings estimates of $1.97 per share, the stock's forward P/E ratio is 36.1. In comparison, the average P/E ratio of the Technology sector is 31.58 and the average P/E ratio of the S&P 500 is 28.21.
Fortinet's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. We can solve this problem by dividing the trailing P/E ratio by the company's five year earnings growth estimate, which in this case gives us a 2.96 Price to Earnings Growth (PEG) ratio.
A PEG ratio between 0 and 1 indicates a potentially undervalued stock. This metric is useful because some companies have a low P/E ratio for a reason: there is no earnings growth potential in the stock. Other companies may have high P/E ratios, but may still be undervalued if they have very high expected earnings growth rates. The main caveat with the PEG ratio is that it relies on the company's earnings growth estimates, which are potentially subject to manipulation.
We can also compare the ratio of Fortinet's price to its book value. A company's book value refers to its present equity value: what is left when we subtract its liabilities from its assets. FTNT has a book value of 188.73, with anything close or below one indicating a potentially undervalued company.
A comparison of the share price versus company earnings and book value should be balanced by an analysis of the company's ability to pay its liabilities. One popular metric is the Quick Ratio, or Acid Test, which is the company's current assets minus its inventory and prepaid expenses divided by its current liabilities. Fortinet's quick ratio is 1.187. Generally speaking, a quick ratio above 1 signifies that the company is able to meet its liabilities.
Next up in our analysis is Fortinet's free cash flow, which stands at $1.73 Billion. This represents the cash that is available to the company after all of its expenses and income are accounted for -- including those that arise outside of its core business activities. This money can be used to re-invest in the business or to payout a dividend. For now, at least, Fortinet has chosen the former.
By most metrics, Fortinet is an undervalued stock. So why are analysts giving it a low rating? It probably has to do with their perception of its limited growth potential, as represented by its elevated PEG ratio. For growth-oriented investors, FTNT is cheap for a reason. On the other hand, diehard value investors believe that if you wait long enough an undervalued stock will always reach a fair valuation. We will continue to monitor the stock to see which thesis prevails.
