According to the U.S. Federal Reserve Board, non-financial companies in the U.S. accumulated $1.84 trillion in cash and other liquid assets up to the end of March. The Globe and Mail ran an article July 4, speculating on what these companies will do with the historic levels of cash. There are only a few things a business can do with excess funds. The most likely target being stock repurchases, which were up 80% in the first quarter year-over-year. These will continue to mushroom. The most unlikely candidate for aggressive spending in my opinion is business expansion. I just don't get the feeling CEOs have a warm and fuzzy feeling about the economy right now. I hope I'm wrong. In the meantime, I've selected five consumer discretionary companies holding large amounts of cash with suggestions on how they should allocate it.
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Five Companies With a Lot of Cash
|Company||Total Cash||Market Cap|
|Hampshire Group (OTCBB:HAMP)||$40.5M||$29.1M|
|Scripps Network Interactive (NYSE:SNI)||$321.0M||$6.8B|
|Deckers Outdoor (Nasdaq:DECK)||$357.3M||$1.8B|
|World Wrestling Entertainment (NYSE:WWE)||$226.5M||$1.1B|
This micro cap is the largest marketer of sweaters in North America with private label clients such as J.C. Penney (NYSE:JCP) and Lands End. Its revenues in the past five years have been cut in half to $165 million at the end of 2009 and it hasn't turned a profit since 2006, when it generated a meager $4 million in profit on $348 million in sales. These are tinier margins than the grocery store business. My suggestion is to liquidate. It has $80 million in total assets, $41 million of which is cash. The remaining $39 million in assets includes $11 million in net property, plant and equipment as well as inventory and receivables. Let's assume it can recover half of this amount for another $19.5 million. It would have $60.5 million in cash less $26 million in liabilities, leaving $34.5 million or $5.46 a share. This is significantly higher than the current trading range of the shares.
Scripps Network Interactive
In December, Scripps added the Travel Channel to its long list of successful cable channels, entering a partnership with Cox Communications. Cox contributed the channel itself in return for a 35% interest and Scripps made cash contributions of $181 million and guaranteed $885 million in senior notes in return for a 65% controlling stake. With lots of cash being generated by the Travel Channel, HGTV and The Food Network, the company may be tempted to pay down some of the debt. However, with the interest rate set at 3.55%, it's not imperative. However, its stock isn't that cheap right now so I'd wait until it drops into the low 30s and then I'd be a buyer.
Deckers' stock split 3-for-1 on July 5. It now has approximately 39 million shares outstanding. With no debt to repay and trading at a price-to-book of 3.57, it should continue opening flagship stores for its UGG Australia brand and possibly Teva as well. Secondly, with the tax laws likely to change in 2011, I'd consider a special dividend of $2.25 a share - but not until the fourth quarter to keep the speculators on board. Otherwise, it's running great and continues to be a leader in footwear. (Are all the ratios making you see red? Check out Investopedia Video for easy-to-understand explanations of P/E Ratio, CAGR and much more)
World Wrestling Entertainment
CEO Vince McMahon at 65 could still put a serious hurt on me so I'll tread softly with my recommendations. It has just $3.6 million in debt and $226.5 million in cash. It pays a $1.44 annual dividend so it's returning plenty to shareholders, including McMahon himself. There's no need to raise it. As for its stock, its no steal, but it is trading at or below its historical norm. I'd be buying between $10 and $15. In terms of operations, I would throw a significant portion of the excess cash into further developing international revenues beyond the 27% overall it currently generates. This is a global brand with plenty of room for expansion. I'm sure McMahon and company will make the right calls.
Volcom has an obscene amount of cash. At the end of the first quarter it was holding $109 million with a market cap of $444 million. Its cash-adjusted earnings yield is currently 7.9%, which compares favorably with competitor Quiksilver (NYSE:ZQK) whose cash-adjusted yield is 6.1%, albeit with about $877 million more debt than Volcom. Really, there's no comparison. What to do with all this cash? Three things. First, pay a $1 special dividend to thank shareholders for hanging in there the last couple of years. Second, continue opening Volcom shops both here and in Europe. Third, continue to focus on Europe where operating profits are substantially higher. In the first quarter, its operating profit in Europe was more than double the U.S. on half the revenue. You don't have to be a mathematician to know that's a good thing.
Shareholders aren't going to sit on their hands forever. I've just given these five lucky companies some specific solutions. I hope they listen to some of them. (Find out how a simple calculation can help you uncover the most efficient companies. For further reading, check out Understanding The Cash Conversion Cycle.)
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