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3 Cash-Stuffed Companies
If all of the calamity in the markets over the past two years has taught investors anything it is that cash truly is king. Wall Street seems to have renewed its focus on a company's cash holdings, which is probably a byproduct of tight credit markets. More than ever, investors hear the experts and gurus extolling the virtues of companies with strong cash positions.
Investors should make examining a company's cash flow statements regular practice; prudent management teams are more apt to use excess cash flow to reward shareholders with increased or special dividends. Not to mention that in the current market environment, astute companies with excess cash can acquire rivals on the cheap to bolster market share.
Setting Up the Screen
With that in mind, we used the Fourth of July holiday to run a screen of stocks that are trading at levels that would be considered "low" relative to their free cash flows. A price/free cash flow ratio of 15 or less and, to keep the focus on inexpensive names, a current and forward P/E ratios of 15 or less were used. To narrow the focus on stocks that exhibit potential growth traits, market cap was limited to $2 billion to $10 billion and 2009 EPS growth must be 20% or more. In all, the search turned up 33 stocks trading at tidy discounts to free cash flow.
IN PICTURES: Eight Ways To Survive A Market Downturn
Obviously, we cannot examine all 33 of those names, so we'll focus on three of the more familiar names. Let's take a look them in greater detail.
Some Cash In Your Handbag
Coach is best known as the maker of the pricey handbags and wallets that so many women crave. To be sure, a weak economy is never good for retailers, even those targeting a more affluent clientèle like Coach does. That said, Coach has navigated the current downturn in consumer spending with aplomb and the stock is up over 20% year-to-date, compared to the S&P 500's flat returns over the same period.
Even better for shareholders is the fact that Coach boasted $180 million in free cash flow for the third quarter compared with $52 million in the year-earlier period. And what is the Coach management team doing with that excess cash? Not committing the cardinal sin that so many retailers fall prey to: overexpanding. The company has tempered expansion plans to 20 new stores in the next two years, down from 40 as previously planned. During the third quarter, Coach repurchased $50 million of its own stock and has $710 million left under the current buyback program. That's what a solid management team should do when it has extra cash in its coffers. (Learn more about ways free cash flow can be affected by accounting tricks in Free Cash Flow: Free, But Not Always Easy.)
On the basis of Coach's ability to weather the economy's ups and downs, reduce costs, maintain a sturdy cash position and make sensible plans for expansion, the company is poised to perform well when the economy finally gets out of its doldrums.
Fun, Games ... and Cash
GameStop is the ubiquitous purveyor of video game outlets at strip malls throughout the U.S. Seriously, these things are like Starbucks coffee shops for kids. It's hard to find a shopping center without a GameStop outlet these days, and the company is planning 400 new store openings across the globe this year. It can afford to do so given the 38% pop in earnings for fiscal 2008 compared to fiscal 2007.
It appears as though 2009 is going to be a rosy year for GameStop as the company is forecasting sales growth of 10-12% and EPS growth of 18-22%. On top of all that, GameStop is calling for more than $500 million in free cash flow AFTER investing in $170 million in capital improvements and all those new store openings.
Unfortunately, a new competitor is also on the horizon for GameStop on the used video game front. Electronics retail giant Best Buy (NYSE:BBY) is slated to challenge GameStop in the lucrative used game market again after pulling out of the market after failed tests in 2005. GameStop already competes with Wal-Mart (NYSE:WMT), Amazon (Nasdaq:AMZN) and Toys R Us in this market, but all are relatively new entrants to a market that GameStop dominates.
GameStop doesn't pay a dividend, so that could be one avenue for some of the excess cash, as would a share buyback. Even if neither of those scenarios materializes, it's hard to find companies growing earnings at such low P/Es the way GameStop is, not to mention a company that is laden with this much cash.
A Speculative Play
It's hard to characterize Foster Wheeler as a speculative name, but in comparison to Coach and GamesStop, the provider of construction and engineering services to the oil and gas industries may be just that at this point. The shares are down about 10% this year, and Foster Wheeler's dependence on the oil and gas sectors makes it difficult to pin down when the stock will turn around. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)
The company is also engaged in heavy construction of biotech and power generation facilities and was mentioned as a possible winner under President Obama's stimulus package. While that hasn't trickled down to shareholders as of yet, Foster Wheeler has generated nearly $429 million in cash from operations as of the end of 2008.
Foster Wheeler has a good fundamental story, but as long as new energy projects such as refineries and gas liquification plants meet their demise in the halls of Congress, it's probably best to take a wait-and-see approach with the stock. The company's cash position makes it worth a spot on your watch list, though.
The Bottom Line: Go Where the Money Is
Companies with overflowing coffers have historically outperformed their cash-strapped peers. That much is true. Mix in soaring earnings, low P/Es and the dominant market positions of names like Coach or GameStop and you might just have a recipe for success.
Investors should make examining a company's cash flow statements regular practice; prudent management teams are more apt to use excess cash flow to reward shareholders with increased or special dividends. Not to mention that in the current market environment, astute companies with excess cash can acquire rivals on the cheap to bolster market share.
Setting Up the Screen
With that in mind, we used the Fourth of July holiday to run a screen of stocks that are trading at levels that would be considered "low" relative to their free cash flows. A price/free cash flow ratio of 15 or less and, to keep the focus on inexpensive names, a current and forward P/E ratios of 15 or less were used. To narrow the focus on stocks that exhibit potential growth traits, market cap was limited to $2 billion to $10 billion and 2009 EPS growth must be 20% or more. In all, the search turned up 33 stocks trading at tidy discounts to free cash flow.
IN PICTURES: Eight Ways To Survive A Market Downturn
Obviously, we cannot examine all 33 of those names, so we'll focus on three of the more familiar names. Let's take a look them in greater detail.
| Company | Forward P/E | Price/Free Cash Flow |
| Coach (NYSE:COH) | 14 | 13.8 |
| GameStop (NYSE:GME) | 6.7 | 11.6 |
| FosterWheeler (Nasdaq:FWLT) | 9.7 | 11.0 |
|
Data as of July 2, 2009 |
||
Some Cash In Your Handbag
Coach is best known as the maker of the pricey handbags and wallets that so many women crave. To be sure, a weak economy is never good for retailers, even those targeting a more affluent clientèle like Coach does. That said, Coach has navigated the current downturn in consumer spending with aplomb and the stock is up over 20% year-to-date, compared to the S&P 500's flat returns over the same period.
Even better for shareholders is the fact that Coach boasted $180 million in free cash flow for the third quarter compared with $52 million in the year-earlier period. And what is the Coach management team doing with that excess cash? Not committing the cardinal sin that so many retailers fall prey to: overexpanding. The company has tempered expansion plans to 20 new stores in the next two years, down from 40 as previously planned. During the third quarter, Coach repurchased $50 million of its own stock and has $710 million left under the current buyback program. That's what a solid management team should do when it has extra cash in its coffers. (Learn more about ways free cash flow can be affected by accounting tricks in Free Cash Flow: Free, But Not Always Easy.)
On the basis of Coach's ability to weather the economy's ups and downs, reduce costs, maintain a sturdy cash position and make sensible plans for expansion, the company is poised to perform well when the economy finally gets out of its doldrums.
GameStop is the ubiquitous purveyor of video game outlets at strip malls throughout the U.S. Seriously, these things are like Starbucks coffee shops for kids. It's hard to find a shopping center without a GameStop outlet these days, and the company is planning 400 new store openings across the globe this year. It can afford to do so given the 38% pop in earnings for fiscal 2008 compared to fiscal 2007.
It appears as though 2009 is going to be a rosy year for GameStop as the company is forecasting sales growth of 10-12% and EPS growth of 18-22%. On top of all that, GameStop is calling for more than $500 million in free cash flow AFTER investing in $170 million in capital improvements and all those new store openings.
Unfortunately, a new competitor is also on the horizon for GameStop on the used video game front. Electronics retail giant Best Buy (NYSE:BBY) is slated to challenge GameStop in the lucrative used game market again after pulling out of the market after failed tests in 2005. GameStop already competes with Wal-Mart (NYSE:WMT), Amazon (Nasdaq:AMZN) and Toys R Us in this market, but all are relatively new entrants to a market that GameStop dominates.
GameStop doesn't pay a dividend, so that could be one avenue for some of the excess cash, as would a share buyback. Even if neither of those scenarios materializes, it's hard to find companies growing earnings at such low P/Es the way GameStop is, not to mention a company that is laden with this much cash.
A Speculative Play
It's hard to characterize Foster Wheeler as a speculative name, but in comparison to Coach and GamesStop, the provider of construction and engineering services to the oil and gas industries may be just that at this point. The shares are down about 10% this year, and Foster Wheeler's dependence on the oil and gas sectors makes it difficult to pin down when the stock will turn around. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)
The company is also engaged in heavy construction of biotech and power generation facilities and was mentioned as a possible winner under President Obama's stimulus package. While that hasn't trickled down to shareholders as of yet, Foster Wheeler has generated nearly $429 million in cash from operations as of the end of 2008.
Foster Wheeler has a good fundamental story, but as long as new energy projects such as refineries and gas liquification plants meet their demise in the halls of Congress, it's probably best to take a wait-and-see approach with the stock. The company's cash position makes it worth a spot on your watch list, though.
The Bottom Line: Go Where the Money Is
Companies with overflowing coffers have historically outperformed their cash-strapped peers. That much is true. Mix in soaring earnings, low P/Es and the dominant market positions of names like Coach or GameStop and you might just have a recipe for success.
by
Todd Shriber
Todd Shriber was a financial journalist for five years with Bloomberg News and MergerMarket.com, covering a variety of sectors, including energy, financials and technology. He is also a Series 7 license holder and has actively traded equities, forex and options.
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