3 Dirt Cheap Stocks Trading for Less Than 4 Times Cash Flow

Image source: Getty Images.

Identifying "cheap stocks" is perhaps the greatest challenge the long-term investor faces. A stock's relative "cheapness" can vary from sector to sector, and, as sometimes is the case, a cheap valuation can be a direct result of worsening fundamentals and growing shareholder concern. Weeding out the potential problem stocks from those with long-term potential is the real challenge.

One metric commonly used to screen for cheap stocks is the P/E ratio, which examines a stock's price relative to its current or future profit potential. While this method does indeed work to identify value stocks, earnings per share can be easily manipulated by one-time benefits and costs. This is where screening for cash flow can come in handy, since companies can't work their accounting magic on their cash inflows and outflows. Cash flow can tell investors a lot about whether a business is operationally profitable and just in a rough patch, or whether there are bigger problems at hand.

Using a stock screener in search of what I considered to be dirt cheap stocks, the following names emerged -- and they're all trading for less than four times Wall Street's current-year cash flow estimate.

Image source: Noble Corporation.

Noble Corporation

In general, oil stocks have been beaten to a pulp, and offshore driller Noble Corporation (NYSE: NE) is no exception. Shares of Noble are down 45% year-to-date, and nearly 80% over the trailing two-year period as offshore drilling opportunities have dried up. With crude oil plunging at one point by well over 75% from its near-term highs, the incentive to recover more expensive offshore fossil fuels fell by the wayside and significantly hurt Noble's business.

However, I don't consider the business model broken, which is what could make Noble a steal at its current price.

There's no denying that offshore drillers could be in for a rough 2016 and/or 2017 based on an oversupply of offshore drilling rigs and weak demand for new offshore projects. However, Noble has a number of factors working in its favor. To name just a few:

  • Noble's jackup rigs are predominantly contracted out in 2016 (85% committed) and 2017 (67% committed).
  • Capital expenditures are declining at a rapid rate. After spending an average of $1.8 billion a year between 2011 and 2014, capex for 2017 could be less than $300 million.
  • Noble has one of the newest fleets, with an average age of 10 years. Newer fleets tend to be more efficient at recovery, and they typically command higher average dayrates.
  • The company maintains one of the lowest debt-to-equity ratios among the offshore drillers, with more than half of its debt due in 2025 or later.
  • It had a $5.3 billion backlog as of May 31, 2016 that should keep it cash flow positive through the end of the decade.

We've already witnessed a pretty substantial bounce in crude oil prices from earlier in the year, and a further stabilization in the price of oil could entice integrated oil companies to once again begin contracting offshore projects. I believe Noble is perfectly set up to take advantage of this opportunity. Valued at less than two times its estimated cash flow per share in 2016, Noble could make for an attractive long-term buy.

Image source: Getty Images.

Penn National Gaming

Another dirt cheap stock based on its cash flow is Penn National Gaming (NASDAQ: PENN), an owner and manager of gaming facilities across the United States.

As you might have guessed, the health of the U.S. economy can certainly affect the nature of the gaming industry. With both Q4 2015 and Q1 2016 GDP coming in well below where the Federal Reserve would like, it's not surprising that Penn National Gaming reported weakness in gaming trends beginning midway through the second quarter. Despite this weakness, there's still a lot to like about Penn National Gaming.

For instance, organic expansion has been a big key to the company's success -- and it's primarily been fueled by its strong cash flow. In San Diego, Penn supplied more than $260 million in funding for the Hollywood Casino Jamul-San Diego, which will feature more than 1,700 slot machines, 43 live gaming tables, and a host of dining amenities. It's set to open within a matter of days/weeks. Penn's cash flow also allowed the company to refresh its Tropicana Las Vegas location with new slot machines and refinements to its live tables. The ability to expand to new locations or improve existing ones gives Penn an opportunity to grow its EBITDA by a mid-to-high single-digit perecentage annually.

Inorganic growth opportunities have added to Penn's top- and bottom-line, too. The company's Hollywoodcasino.com social casino business is small, but profitable, which encouraged Penn to acquire social gaming developer Rocket Games for $60 million in early August. At 6.25 times Rocket Games' EBITDA, the transaction is expected to be immediately accretive to Penn National's bottom-line.

Finally, don't forget that economic expansions last for a longer period of time than recessions and contractions, meaning that over the long-term the gaming industry is poised to take more steps forward than backward.

Based on Wall Street's 2016 expectations, Penn National is valued at just below four times its estimated cash flow per share, and could therefore be a gamble worth taking.

Image source: Greenbrier Companies.

The Greenbrier Companies

A final dirt cheap stock worth strong consideration for your portfolio is railroad car and parts manufacturer Greenbrier Companies(NYSE: GBX).

Similar to Noble, it's no secret why Greenbrier has struggled in the past couple of years. A number of commodity prices have slumped, including oil, coal, and select metals. With the prices of these goods down, producers have little incentive to increase production, thus lowering the demand for certain types of railcars. Furthermore, we've witnessed weakness from China, with its GDP growth slowing to a roughly 25-year low. Given that China is a major importer of goods, U.S. exporters and logistics companies are concerned, which has adversely impacted Greenbrier.

In spite of recent weakness, a number of factors are working in Greenbrier's long-term favor. For instance, the age of existing railcars will merit an ongoing replacement cycle that should keep Greenbrier busy. Further, shipping by rail is actually much more fuel-efficient than shipping by truckload, which should favor railroads and railcar makers over the long run. In the nearer-term, Greenbrier believes lower energy prices could actually create a boon in chemical and plastic industry shipments due to lower input costs. In other words, Greenbrier has enough production diversity that it's usually able to hedge against economic hiccups.

In addition to retail sales, Greenbrier is finding success in leasing its railcars. Purchasing railcars isn't cheap, and Greenbrier would much rather sell than lease its cars, because sales result in better margins. However, given the reduction in key commodity prices, Greenbrier has been able to lease some of its fleet to generate extra cash flow without pinching its customers' pocketbooks.

Greenbrier ended the most recent quarter with a railcar backlog of about 31,200 units, with an estimated value of $3.6 billion, so it's not as if the company is in any way hurting for new orders. Its board also declared a 5% increase to its quarterly dividend, placing its new yield at 2.5%.With Greenbrier valued at less than four times its projected cash flow per share in 2016, investors may want to "choo-choo-choose" it for their portfolios.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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