Its shares falling by -23.9% today, Fortinet seems to be confirming what most analysts are saying about the stock. Despite its average rating of hold, might the stock be attractive to long term value investors? Let's unpack some of the company's fundamentals to find out.
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 Fortinet is 27.3, 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 73.5 divided by either its trailing or forward earnings, which for Fortinet are $2.43 and $2.41 respectively. Based on these values, the company's trailing P/E ratio is 30.2 and its forward P/E ratio is 30.5. 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 Fortinet'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 1.21. Since FTNT's quick ratio is higher than 1, its total liquid assets are sufficient to meets its current liabilities.
When we had up all the inflows and outflows of cash, including payments to creditors, we obtain Fortinet's levered free cash flow of $2.1 Billion. This represents the money left over from the company's operations that is available for reinvestment in the business, or for paying out to equity investors in the form of a dividend. Despite its positive cash flows, Fortinet does not currently pay a dividend.
The market may be punishing Fortinet 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.
