Thursday’s Top Upgrades and Downgrades: VMware, Inc. (VMW), Avon Products, Inc. (AVP), The Progressive Corporation (PGR)

I agree.

AlthoughVMware, Inc. (NYSE:VMW) looks pricey on the surface with a P/E ratio of 49, the firm generates robust free cash flow of $1.66 billion annually — more than twice its reported “GAAP” income. This results in a P/FCF ratio of 21.5 on the stock, which is right in line with VMware’s 21% projected long-term growth rate.

Now, what takes this stock from “fairly priced” to “undervalued” is the fact that with VMware generating so much cash, the greenbacks tend to stack up in its bank account. VMware, Inc. (NYSE:VMW)’s balance sheet shows about $4.1 billion more cash than debt to the company’s credit, meaning that its stock is actually even cheaper than the P/FCF ratio makes it look. At an enterprise-value-to-free-cash-flow ratio of less than 17 and a growth rate of more than 20%, I think VMware is a great stock selling for a good price.

It may not hit the exact $110 price target RBC has set for it, but so long as the company achieves the growth it’s projected to, VMware, Inc. (NYSE:VMW) shares are definitely destined to go up.

The article Thursday’s Top Upgrades and Downgrades originally appeared on Fool.com and is written by Rich Smith.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends VMware. The Motley Fool owns shares of VMware.

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