Is Citrix Systems, Inc. (NASDAQ: CTXS) A Buy At This Enterprise Multiple?

in VALUATION MULTIPLES by

Citrix Systems, Inc. (NASDAQ: CTXS), an information technology firm with a market capitalization of $14.1 billion, currently trades at a Sales Multiple of 4.8x which is above the sector’s median multiple of 2.2x. Although this makes CTXS look unattractive, investors may change their mind after reviewing the assumptions behind the EV / Sales ratio. In the post below, I calculate Citrix’s fair value using a Sales Multiples valuation.


How To Interpret Citrix’s Sales Multiple

A multiples valuation, also known as a comparable companies analysis, determines the value of a subject company by benchmarking the subject’s financial performance against companies deemed to be similar. We can then determine if a company is undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation multiples.

EV / Sales, also known as Enterprise Value-to-Sales Multiple or a Sales Multiple, measures the dollars in Enterprise Value for each dollar of revenue. Its key benefit over the P/E multiple is that it’s capital structure-neutral, and, therefore, better at comparing companies with different levels of debt. The general formula behind a Sales Multiples valuation model is the following:

Enterprise Value = Revenue x Selected Multiple

The EV / Sales ratio by itself is not very helpful at all. It is only useful when comparing it to other companies that are considered similar to the subject company. The basic idea is that companies with similar characteristics should trade at similar multiples, all other things being equal. Therefore, we can come to a conclusion about the stock if the ratios are different. In the chart below, I compare Citrix’s EV / Sales ratio to its peer group that includes Red Hat, Inc.(NYSE: RHT), ServiceNow, Inc. (NYSE: NOW), Vmware, Inc. (NYSE: VMW) and Salesforce.com Inc (NYSE: CRM).

CTXS Sales Multiple vs Peers Chartsource: finbox.io Benchmarks: Sales Multiples

Since Citrix’s EV / Sales ratio of 4.8x is lower than the median of its peers (9.2x), it means that investors are paying less than they should for each dollar of CTXS’s revenue. As such, our analysis shows that CTXS represents an undervalued stock. Furthermore, finbox.io’s EV / Sales Ratio Model calculates a fair value of $184.11 per share which implies 78.9% upside.

CTXS EV / Sales Valuation Calculation

I selected a fair multiple of 8.7x in my analysis by averaging Citrix’s current EV / Sales ratio with its peer group.


Sales Multiple Flaws

While this approach typically provides a reasonable valuation range, it is important to understand that our conclusion rests on some important assumptions. The first being that the selected peer group actually contains companies that truly are similar to Citrix. The second important assumption is that the selected peer group stocks are being fairly valued by the market.

If the assumptions above do not hold to be true, then the difference in EV / Sales ratios could be due to a variety of factors. For example, if you accidentally compare Citrix with higher growth companies, then its sales multiple would naturally be lower than its peers since investors reward high growth stocks with a higher price. Furthermore, sales multiples are highly correlated with EBITDA margins so differences in profit margin often explain differences in valuation.

CTXS revenue Growth and Margins vs Peers Tablesource: sales multiples model

Now if the second assumption does not hold true, Citrix’s lower multiple may be because firms in our peer group are being overvalued by the market.


What To Do Next

As a current investor, you may have already conducted fundamental analysis on the company and its stock so its current undervaluation could signal a potential buying opportunity to increase your position in CTXS. But keep in mind the EV / Sales ratio’s potential flaws when applying this valuation approach. It is important to note that there are a variety of other fundamental factors that I have not taken into consideration in this article. I highly recommend that you continue your research on Citrix by taking a look at the following:

Valuation Metrics: what is Citrix’s short ratio and how does it compare to its publicly traded peers? It represents the percentage of total shares outstanding that is being shorted. View the short ratio here.

Risk Metrics: how much interest coverage does Citrix have? This is a ratio used to assess a firm’s ability to pay interest expenses based on operating profits (EBIT). View the company’s interest coverage here.

Efficiency Metrics: fixed asset turnover is calculated by dividing revenue by average fixed assets. View Citrix’s fixed asset turnover here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Expertise: financial modeling, mergers & acquisitions. Andy is also a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to do investment research. Andy’s background is in investment banking where he led the analysis on over 50 board advisory engagements involving mergers and acquisitions, fairness opinions and solvency opinions. Some of his board advisory highlights: - Sears Holdings Corp.’s $620 mm spin-off via rights offering of Sears Outlet, Hometown Stores and Sears Hardware Stores. - Cerberus Capital Management’s $3.3 bn acquisition of SUPERVALU Inc.’s New Albertsons, Inc. assets. Andy can be reached at andy@finbox.io or at +1 (516) 778-6257.

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