Today shares of Wipro have fallen -3.5%, vindicating the analysts who have given the stock an average rating of underperform. But could they be wrong? Some factors show that Wipro may actually be undervalued at today's prices, giving long term investors a potentially interesting opportunity.
Let's start our value analysis with the price to book (P/B) ratio. This is perhaps the most basic measure of a company's valuation, which is its market value divided by its book value. Book value refers to the sum of all of the company's tangible assets minus its liabilities -- you can also think of it as the company's equity value.
Traditionally, value investors would look for companies with a ratio of less than 1 (meaning that the market value was smaller than the company's book value), but such opportunities are very rare these days. So we tend to look for company's whose valuations are less than their sector and market average. The P/B ratio for Wipro is 0.03, compared to its sector average of 4.19 and the S&P500's average P/B of 4.74.
The most common metric for valuing a company is its Price to Earnings (P/E) ratio. It's simply today's stock price of 2.77 divided by either its trailing or forward earnings, which for Wipro are $0.15 and $0.29 respectively. Based on these values, the company's trailing P/E ratio is 18.5 and its forward P/E ratio is 9.6. By way of comparison, the average P/E ratio of the Technology sector is 30.44 and the average P/E ratio of the S&P 500 is 29.3.
Indebted or mismanaged companies can't sustain shareholder value for long, even if they have strong earnings. For this reason, considering Wipro's ability to meet its debt obligations is an important aspect of its valuation. By adding up its current assets, then subtracting its inventory and prepaid expenses, and then dividing the whole by its current liabilities, we obtain the company's Quick Ratio of 2.295. Since WIT's quick ratio is higher than 1, its total liquid assets are sufficient to meets its current liabilities.
One last metric to check out is Wipro's free cash flow of $1.98 Billion. This represents the total sum of all the company's inflows and outflows of capital, including the costs of servicing its debt. It's the final bottom line of the company, which it can use to re-invest or to pay its investors a dividend. With such healthy cash flows, investors can expect Wipro to keep paying its 208.9% dividend.
The market may be punishing Wipro today, but many investors will be seeing this as an opportunity to pick up shares at a discount. Despite the lack of enthusiasm from analysts, this stock may hold some potential for patient investors.
