Finding Cash-Flow Juggernauts

12/30/2013


In basketball, the best free throw shooters typically rely on a routine or ritual to help improve their odds. To uncover truly high-potential stocks, our routine starts with our Quadrix stock-rating system. But we always take a closer look to see if stocks are being scored accurately.

Cash-flow growth rates can help us measure underlying operating momentum and confirm a stock's Quadrix scores. Importantly, cash provided by operations (CPO) is harder to manipulate than earnings. Free cash flow — CPO minus capital spending and dividends — represents discretionary money a company can use to execute its business plan.

5 CASH-FLOW LEADERS
12-Month Growth
Price/Free
---- Cash Flow ----
Company (Price; Tickers)
CPO
(%)
Free
Cash
Flow
(%)
CPO/Net
Income
Stock
%
Rank
Quadrix
Overall
Score
Capital One Financial
($75; COF)
67
63
3.9
2.9
98
96
Dover ($95; DOV)
27
65
1.4
19.6
60
81
Magna International
($79; MGA)
26
187
1.6
19.8
59
98
Qualcomm ($73; QCOM)
46
81
1.3
22.3
52
98
Skyworks Solutions
($28; SWKS)
75
97
1.8
14.0
74
99
Note: Quadrix scores are percentile ranks, with 100 the best.

Listed above are five standout cash-flow plays, all of which pass the following screen:

• Double-digit growth in CPO and free cash flow over the last 12 months.

• CPO that outstrips net income, a sign of quality earnings. When CPO exceeds net income, we're less concerned that a company might be using aggressive accounting methods to inflate profits.

• Above-average Quadrix scores for price/free cash flow ratio — a particularly effective valuation metric in our stock-rating system.

• Quadrix Overall scores above 80, with solid scores for Quality (long-term growth record) and Momentum (recent operating results).

Gains in Capital One Financial's ($75; COF) core credit-card business and proceeds from loan sales have sparked impressive CPO (up 67% over the past 12 months) and free cash flow (up 63%). With a percentile rank of 98, the stock scores among the very best in our research universe for price/free cash flow. The Overall score is 96, keyed by a 90 in Value, ranking Capital One near the cheapest 10% of U.S.-traded stocks. The stock is a Focus List Buy and a Long-Term Buy.


Dover ($95; DOV) generates a ton of free cash flow — roughly $831 million over the past 12 months — money often used to fund acquisitions. Notably, CPO has risen 27% and free cash flow 65%. Dover looks cheap considering its growth outlook, earning a Value score of 67, reflecting solid ranks for price/cash flow and price/free cash flow. Per-share earnings are expected to climb 19% this year and 13% in 2014. The stock is a Focus List Buy and a Long-Term Buy.


With strong finances and robust cash flow, Skyworks Solutions ($28; SWKS) has ample resources for expansion. Over the past 12 months, CPO has surged 75%, while free cash flow has nearly doubled. Skyworks, which makes radio-frequency semiconductors that connect mobile devices, has no debt and nearly $2.70 per share in cash on its balance sheet. The company's products are used by tech giants Cisco Systems ($21; CSCO), and Google ($1,101; GOOG). The stock earns an Overall score of 99, with outstanding scores for Momentum (94), Value (87), and Quality (95). Skyworks is a Buy and Long-Term Buy.


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