5 stocks where cash (flow) is king
Posted
Jul 09 2009, 04:40 PM
by
CAPS Editor
Rating:
Th![]()
is post comes from Rich Duprey at partner site The Motley Fool.
Had Jerry Maguire been an investor instead of a fictional sports agent, he might have become famous for yelling, "Show me the cash flow!"
Earnings come and go, and the green-eyeshade types can legally manipulate them to mask a company's true operations. Yet a company's ability to generate cash remains the preeminent indicator of its worth.
In short, cash is king.
Let's look at companies that have proven themselves prodigious generators of free cash flow, which is the amount of money a company has left over that it could potentially pay to its investors.
We'll find companies that have generated compounded FCF growth rates of at least 25% annually over the past five years, then look at how the companies are perceived by the MSN CAPS investor intelligence community. Combining the CAPS ratings and commentary with cash-flow data should lead us to investments capable of outperforming the market.
Consider these five cash-flow kings:
Apple (AAPL) sold more than 1 million units of its latest iPhone model in the first three days the device was on the market, making it the company's most successful smart-phone model yet. The Cupertino, Calif., company has generated free cash flow at a five-year compound annual growth rate of 138%, according to Standard & Poor's. At CAPS, the stock has a three-star rating.
Eli Lilly (LLY) sells its drugs, including antidepressant Prozac and osteoporosis medication Evista, in more than 135 countries. The Indianapolis company has generated free cash flow at a five-year compound annual rate of 62%, according to Standard & Poor's. At CAPS, the stock gets four stars.
Immucor (BLUD) offers systems used by hospitals, blood banks and clinical laboratories to test blood prior to using it for transfusions. The Norcross, Ga., company has generated free cash flow at a five-year compound annual rate of 41%. At CAPS, the stock has a four-star rating.
Quantum (QTM) sells its data-storage hardware and software to some of the nation's biggest technology companies. The Silicon Valley company has generated free cash flow at a five-year compound annual rate of 65%, according to S&P. The stock has a two-star rating at CAPS.
Transocean (RIG) contracts with some of the world's biggest energy producers to drill in deep water for oil and gas. It has generated free cash at a five-year compound annual rate of 88%. At CAPS, the stock has the rating of top five stars.
Generating copious amounts of cash doesn't make a company an automatic buy. But Warren Buffett, for one, understands that the value of a company today is calculated by its discounted future cash flows. And investors who looked at Enron's cash flows instead of its earnings would have saved themselves a lot of grief.
This list is not intended as a prospectus of stocks to buy. Your due diligence on this narrowly focused list is always a smart requirement.
Meanwhile, let's take a closer look at one of our candidates.
It might never reach such an iconic status that its fans start tattooing the Macintosh logo on their biceps, a la Harley-Davidson (HOG), but Apple's iconic stature nonetheless remains unassailable. With its suite of must-have products, there's little surprise in its ability to generate an impressive amount of free cash.
While the current recession might put a dent in consumers' appetites for product upgrades, this seems to be a transient concern. Apple still possesses the technologies that will drive future profits.
One might want to look at the razors-and-blade business model to see how Apple will thrive in the future. As it has been famously told, King Gillette was able to give away the razors and keep consumers coming back to buy the blades. Today's ink-jet-printer-and-cartridge business is similar. Apple, for its part, has this same ability.
Even with the profits it makes on each iPod and iPhone it sells, the future catalyst could be the company's iTunes and Apps stores. Earnings from those businesses eventually may be enough to allow Apple to give away its MP3 players and smart phones, confident that consumers will continue to pay for music and application downloads.
Malcolm Gladwell, the pop-sociology author of "The Tipping Point" and "Blink," says the idea has merit, but because there remains value in the iPod and iPhone, there's no reason Apple wouldn't want to continue to reel in profits from them.
There's cutthroat competition in smart phones from BlackBerry maker Research In Motion (RIMM), while music streams from such competitors as Pandora and Yahoo (YHOO) have some observers thinking iTunes will soon be obsolete. But Apple investors can be rabidly protective of their stock. The more thoughtful shareholders among them understand that Apple's ability to alter consumer tastes will be what keeps the company in the forefront.
Says CAPS member "Gmoney91": "From the introduction of the iPod to the most recent release of the iPhone 3GS, the Apple (folks) know exactly what the consumer wants. This is highly evident considering that the newest iPhone has sold more units faster than any of its predecessors, beating estimates of analysts. Though recent earnings growth has slowed significantly . . . look for this growth rate to regain its luster as the smart phone becomes more and more popular in the American and global consumer marketplace. I currently own the stock and look to keep it as long as it continues to work its magic."
Apple's stock has fallen 4% over the past month, but it has also recovered more than 73% of its value since hitting a low of around $78 a share in January.
Is the stock headed higher? Let us know what you think about Apple and these other cash-flow kings. Check out what your fellow investors are saying about the companies and offer your own opinions at CAPS, the community organized to help investors evaluate stocks, test investment strategies and gather the collective wisdom of more than 132,000 participants.
Each stock's CAPS page is a good place to start your research; you can find a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made. Turn to member blogs for insight and opinion. And the CAPS stock screener tool helps you find companies that satisfy your investment criteria.
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