Is Central Garden & Pet Company (NASDAQ: CENTA) Undervalued or Overvalued?
Today is Wednesday, November 20, 2019 and here’s your daily small cap valuation.
Central Garden & Pet Company (NASDAQ: CENTA) is a small-cap stock that could have a lot of potential. But it’s hard to value smaller companies like this. Conventional valuation metrics like price-to-earnings (P/E) ratio, profit margin, and return on equity (ROE) may not be available for them.
To get a sense of Central Garden & Pet Company's true valuation, let’s compare it to its industry peers — and to itself one year ago. We’ll look at four small cap valuation metrics…
Price-to-Book Value (P/B) Ratio
Central Garden & Pet Company's price-to-book value (P/B) ratio of 1.657 is 43.43% lower than its industry average of 2.929. That’s good. A low P/B ratio indicates that the company has a solid balance sheet — and that based on its balance sheet, the stock is trading for unusually cheap.
Free Cash Flow Yield (FCF/Enterprise Value)
Central Garden & Pet Company's free cash flow yield (FCF/EV) of 7.99% is 139.22% higher than its industry average of 3.34%. That’s good. This metric compares free cash flow (the amount of cash left over after all expenses and capital expenditures have been paid) with enterprise value (a comprehensive alternative to market cap that includes cash and debt).
A high free cash flow yield indicates that a company is performing efficiently — and that it’s in a good position to repay any debt on its books.
Earnings per Share (EPS) Growth
Central Garden & Pet Company has not grown its earnings per share (EPS) in the last year. That’s not good. Negative earnings aren’t the end of the world — they’re fairly common among smaller, newer companies — but if earnings are falling over time, that’s definitely a bad sign.
Gross Margin Growth
Central Garden & Pet Company has grown its gross margin by 1.04% in the last year. That’s good. Many young small caps are unprofitable, so net profit margin isn’t always a useful measure. But a growing gross margin means that the company’s operations are getting more and more profitable over time.
Central Garden & Pet Company scored favorably on 3 of our 4 valuation metrics. With this in mind, we believe the stock is slightly undervalued.
Editor’s Note: We’ve been keeping an eye on a set of small-cap stocks that are a better value than Central Garden & Pet Company. These stocks have the potential for bigger gains — and they’re far less risky than the speculative small caps many investors gamble on. Enter your email below to learn more.
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