Before Investing In Blackbaud Inc (NASDAQ:BLKB), Consider This
If you are currently a shareholder in Blackbaud Inc (NASDAQ:BLKB), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine BLKB’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
View our latest analysis for Blackbaud
What is Blackbaud’s cash yield?
Blackbaud’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Blackbaud to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Blackbaud’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Along with a positive operating cash flow, Blackbaud also generates a positive free cash flow. However, the yield of 3.45% is not sufficient to compensate for the level of risk investors are taking on. This is because Blackbaud’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Blackbaud have a favourable cash flow trend?
Can BLKB improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. Over the next few years, the company is expected to grow its cash from operations at a single-digit rate of 9.2%, increasing from its current levels of US$191m to US$208m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, BLKB’s operating cash flow growth is expected to decline from a rate of 8.9% in next year, to 0.2% in the following year. However, the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Blackbaud as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Blackbaud to get a more holistic view of the company by looking at:
Valuation: What is BLKB worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether BLKB is currently mispriced by the market.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Blackbaud’s board and the CEO’s back ground.
Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
