Why CPI Card Group Stock Keeps Going Up
Key Points
CPI Card stock missed on earnings last week.
Investors panicked at first -- then turned around and bought the stock when they saw all the free cash flow.
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CPI Card Group (NASDAQ: PMTS) stock is on a roll.
Shares of the manufacturer of credit cards and debit cards -- the literal, physical pieces of numbered plastic that you carry around in your wallet -- have risen each of the past three trading days, including a giant 13.3% leap after earnings last week, and a smaller 5.5% hop through 10:30 a.m. ET this morning.
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And yet, investors initially didn't react well to CPI's earnings news.
Not well at all.
Image source: Getty Images.
CPI Card Q2 earnings
Shares of CPI stock sold off after StreetInsider.com reported the company earned only $0.17 per share in Q2, "$0.36 worse than the analyst estimate of $0.53." And yet, if you read a little deeper, the news got better -- and once investors did that, the stock price rout turned into a rally.
What did CPI say to change investors' minds?
First off, the company grew its sales 15% year over year, to $149 million. CPI quadrupled its profit by marrying stronger profit margins to the greater revenue. Free cash flow also went parabolic, shooting up from just $0.5 million a year ago to $25.9 million this time around.
As a result, while CPI claims only $13.8 million for its "net earnings" over the past year, its actual free cash flow generated over the period is $76.5 million.
What this means for CPI Group stock
Valued on GAAP earnings, CPI stock seems reasonably priced at 24 times trailing earnings, but here's the thing: If you value the stock on free cash flow, its price-to-free cash flow ratio drops to just 4.2x -- astoundingly cheap. Even factoring net debt into the picture, the current enterprise value-to-FCF ratio is only 7.5x.
For a stock growing sales at 15%, that's cheap enough to buy.
Should you buy stock in Cpi Card Group right now?
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Rich Smith has positions in Cpi Card Group. The Motley Fool has positions in and recommends Cpi Card Group. The Motley Fool has a disclosure policy.
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