5 Stocks Generating Cash

By Chris Gallant | August 24, 2010 AAA

For most individual investors, analyzing the financial statements of the companies in which they own stock is no easy task. While the numbers reported on a corporate income statement are relatively straightforward, all too often the meaning behind them is not. Accrual accounting being what it is, seemingly simple items such as earnings per share can often prove difficult for investors to value appropriately.

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Earnings Aren't Always Reliable
In fact, a company's reported earnings rarely represent the amount of cash it managed to bank in a given year. This is because there are myriad ways that accounting events can affect a company's accounting income while having no impact on the actual cash transactions a company makes during a reporting period.

Non-cash charges such as the amortization of goodwill or intangible assets can reduce a company's reported earnings significantly, turning what would have been a good-looking earnings number into an apparent failure. On the other hand, sales generated by accounts receivable contribute to reported earnings just as cash sales do, but they won't pay a company's cash expenses, such as payroll. Too much reliance on accounts receivable could put a company in a difficult situation, even while its reported earnings appear just fine.


Cash Is King
This is where prudent comparison of a company's income statement with its cash flow statement serves an individual investor well. After backing out all the non-cash, non-recurring and otherwise impertinent items that are baked into reported earnings, the cash flow statement reveals the true cash-generating ability (or inability) of a company to investors. (For related reading, check out Fundamental Analysis: The Cash Flow Statement and The Essentials Of Cash Flow.)

As such, stocks that generate cash flows significantly greater than their reported earnings can potentially end up undervalued by the market. As well, stocks that are consistently able to produce large amounts of operating cash flow are arguably safer than those that don't, as having plenty of cash coming in the door each quarter makes it that much less likely that a company will run into trouble paying its bills.

With that in mind, here are five stocks generating significant amounts of operating cash flow, yet are trading at relatively cheap valuations on a price-to-cash-flow basis.

Company Market Cap Operating Cash Flow (TTM) Trailing Price/Cash Flow
The Chubb Corporation (NYSE: CB) $16.8 B $2.3 B 7.2
Lockheed Martin (NYSE: LMT) $26.5 B $3.7 B 7.2
Rent-A-Center (Nasdaq: RCII) $1.3 B $208.1 M 6.5
Dean Foods (NYSE: DF) $1.8 B $553.4 M 3.3
Tyson Foods (NYSE: TSN) $6.3 B $1.5 B 4.3
Data as of market close, August 20, 2010.


Dean Foods

Dean Foods provides an example of a company that has consistently hauled in larger amounts of cash flow than it has booked in reported earnings. In its most recently completed full fiscal year (ended December 31, 2009), the company reported a net income of $240.3 million. However, during this same period of time, it actually brought in $658.7 million worth of operating cash flow.

Even after subtracting its capital expenditures of $268.2 million from its operating cash flow, Dean Foods still managed to generate $390.5 million in free cash flow for its shareholders. This represents a significant positive difference from its net income, and a similar type of disparity existed in its previous fiscal year as well. From the individual investor's perspective, this is definitely a positive attribute that lends strength to the bullish case for Dean Foods.

Rent-A-Center
Rent-A-Center's financial statements provide an even stronger example of a company bringing in significantly more cash than its reported earnings would indicate. For example, in its three most-recently completed fiscal years, Rent-A-Center earned $167.9, $139.6 and $76.3 million, while its operating cash flows for each of those same years were $330.1, $384.7 and $240.4 million, respectively.

Why does the company consistently bring home more cash than reported income? Because each year it has been able to reduce its taxable earnings with more than $500,000 million worth of depreciation, which is a non-cash charge. However, its capital expenditures have averaged well under $100,000 per year, and thus its non-cash depreciation amounts each year have essentially acted as a tax shield, because the company has been able to claim the depreciation expense but has not needed to replace the depreciated assets with comparable capital expenditures - at least, not yet.

The Bottom Line
As the examples of Dean Foods and Rent-A-Center illustrate, there is a lot of context behind a company's annual earnings that is not readily apparent from its earnings-per-share number alone. In some cases, companies are consistently able to generate significantly more cash flow than reported earnings, and although it does not look great on an income statement, it can be a boon to stockholders.

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