Big U.S. Firms Flush With Cash

12/22/2014


Strong corporate profits have helped S&P 500 nonfinancial companies stuff their balance sheets with $1.4 trillion in cash, up 19% from three years ago and equal to about 9% of their combined stock-market value.

No sector is more flush than technology, which holds $508 billion in cash, 36% of the total for the index's nonfinancial companies. The sector's cash exceeds total debt by $189 billion, putting the ratio of cash to debt at 159%, versus 40% for all nonfinancial S&P 500 stocks. Just five tech stalwarts account for more than one-half of the sector's reserves and about 20% of the total cash pile for nonfinancial S&P 500 stocks.

PLENTY OF COLD, HARD CASH
For the 407 nonfinancial stocks in the S&P 500 Index with three years of history, cash is up 1% from a year ago and 19% from three years ago. Cash equals about 9% of the 407 companies' combined stock-market value and 40% of total debt. Technology companies hold roughly 36% of the cash, followed by health care at 19%.
--- Net Cash ($Bil.) ---
---- Cash As % Of ----
Sector
(Number Of Companies)
Total Cash, ($Bil.)
(% Of Total For
Index Companies)
Recent
Quarter
($)
3 Years
Ago
($)
Stock-
Market
Value
(%)
Total
Debt
(%)
Cons. Discretionary (83)
160
(11)
(406)
(292)
6.8
28.2
Consumer Staples (40)
99
(7)
(268)
(248)
4.8
26.6
Energy (43)
87
(6)
(257)
(152)
5.7
25.2
Health Care (55)
266
(19)
(124)
(32)
10.0
68.3
Industrials (64)
211
(15)
(504)
(569)
10.6
29.5
Materials (30)
38
(3)
(126)
(79)
6.2
23.2
Technology (64)
508
(36)
189
166
13.1
159.4
Telecom Services (6)
15
(1)
(218)
(147)
3.4
6.5
Utilities (30)
20
(1)
(400)
(307)
3.5
4.8
S&P 500 (exclud. financials)
1,405
(2,114)
(1,660)
8.7
39.8

What will companies do with their excess cash? A meaningful net cash position — the amount by which cash exceeds total debt — can provide a ready war chest for acquisitions. But with interest rates so low and profits and operating cash flow trending higher, we expect companies to put more cash to work via dividends and share repurchases.

Bargain-minded investors should consider cash-adjusted valuation ratios, which show how much you are paying for a company's operating business. Consider Microsoft ($46; MSFT), which had about $7.84 per share in net cash on Sept. 30. Subtracting $7.84 from the stock price and dividing by trailing per-share earnings puts the cash-adjusted P/E at 14, versus a traditional P/E of 17.

In the table below, we list eight companies with large net cash positions relative to stock-market value. All eight, including the three reviewed in the following paragraphs, have cash-adjusted price/earnings, price/sales, and price/cash flow ratios at least 7% below unadjusted ratios.

Foot Locker ($56; FL) boasts an impressive record of growth, fueled by product momentum and solid marketing execution. In recent years, the retailer has benefited from strong sales of high-end athletic shoes, particularly big-ticket basketball offerings. Looking ahead, aggressive expansion into apparel should help sustain growth.

Foot Locker shares slumped briefly after announcing solid October-quarter results on Nov. 21, hurt by concerns about sales volumes. But per-share profits increased 22% to $0.83, outstripping the consensus by $0.04. Revenue rose 7% and also topped expectations. Spurred partly by the solid quarter, analyst estimates for current-year and next-year earnings have trended higher in recent weeks.

Foot Locker holds net cash of $781 million, equating to 10% of the stock's market value, or $5.36 per share. The stock trades at 17 times trailing earnings, but just 15 times earnings if you back out cash. Adjusted for cash, the price/sales ratio is only 1.0. Foot Locker earns an impressive Quadrix Overall score of 98, reflecting a 70 for Value. Foot Locker is a Focus List Buy and a Long-Term Buy.


Google ($506; GOOGL) has about $92.30 per share in cash on its balance sheet, or about 18% of its stock price. The cash balance has grown at a 13% annualized rate over the last three years and now accounts for nearly 45% of total assets. Net cash stands at $57 billion, or roughly $82.70 per share. Subtracting $82.70 from the stock price and dividing by per-share profits puts the cash-adjusted P/E at 17, versus the standard P/E of 21.

With its growing cash pile, Google routinely opens its wallet to fund start-ups and acquire companies. Since 2001, the company has invested some $28 billion in more than 160 companies. Large deals this year include the August acquisition of Skybox, a satellite-imaging firm, for $478 million. In July, Google spent $517 million on Dropcam, a maker of video-monitoring equipment.

Acquisitions should help sustain profit growth and diversify sales. For full-year 2014, the consensus profit estimate is $25.87 per share, implying 18% growth. For 2015, the consensus calls for per-share earnings of $30.40, up another 18%. Google is a Buy and a Long-Term Buy.


Semiconductor-equipment maker Lam Research ($78; LRCX) is leveraged to favorable capital-spending trends at major chip makers, with giants Samsung Electronics and Taiwan Semiconductor ($22; TSM) among its largest customers. According to technology research firm Gartner, spending on semiconductor equipment is expected to climb 17% in 2014, followed by 11% next year, reflecting a production ramp at memory makers.

Helped by robust demand, per-share earnings are expected to climb 7% to $4.71 for fiscal 2015 ending June. Sales should reach $5 billion, up 10%. For fiscal 2016, the per-share-profit consensus stands at $5.45, up 16%. Lam's per-share earnings have topped the consensus in seven consecutive quarters.

On Sept. 30, net cash per share stood at $8.72, up 31% from a year earlier and equaling 11% of the stock price. In April, Lam announced a quarterly per-share dividend of $0.18 and an $850 million stock-buyback plan that should spill into 2016. Yielding 0.9%, Lam is a Focus List Buy and a Long-Term Buy.

CASH-RICH AND REASONABLY VALUED
The eight A-rated stocks below all hold net cash that exceeds 5% of their stock-market value. All eight earn above-average Quadrix Value scores and solid Overall scores. Stocks recommended for purchase in bold.
---------- Net Cash ----------
------ P/E Ratio ------
---- Price/Sales ----
Price/Cash Flow
Quadrix Scores
Company (Price; Ticker)
Recent
Quarter
($Mil.)
Per
Share
($)
As % Of
Stock
Price
Recent
Net-Cash
Adjusted
Recent
Net-Cash
Adjusted
Recent
Net-Cash
Adjusted
Value
Overall
Alaska Air ($56; ALK)
518
3.80
7
14.8
13.8
1.42
1.32
7.1
6.6
74
99
Anthem ($124; ANTM)
6,607
23.25
19
15.5
12.6
0.46
0.37
10.0
8.1
75
79
Cognizant Technology
($51; CTSH)
4,618
7.55
15
20.3
17.3
3.14
2.68
18.8
16.0
58
96
Corning ($21; GLW)
2,421
1.72
8
15.5
14.3
2.95
2.71
5.6
5.1
77
95
Foot Locker ($56; FL)
781
5.36
10
16.6
15.0
1.15
1.04
12.4
11.2
70
98
Google ($506; GOOG)
56,918
82.70
16
20.5
17.2
5.30
4.40
16.2
13.5
53
65
Lam Research
($78; LRCX)
1,544
8.72
11
17.1
15.2
2.63
2.34
15.5
13.8
62
96
Microsoft ($46; MSFT)
65,473
7.84
17
17.2
14.2
4.14
3.43
11.7
9.7
51
75
Note: Quadrix scores are percentile ranks, with 100 the best.

 


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