Deal Yourself A Cash-Flow Flush

4/11/2011


Smart card players look for "tells" — subtle signals that give clues about another player's hand. Astute investors do the same by observing the actions of corporate managers. One way is to watch how companies use cash flow.

Cash flow is the lifeblood of most firms, and how a company deploys it can say volumes about the growth outlook. To that end, we screened for companies prudently using cash flow in the following ways:

•Â Dividend growth. Dividends are key to many stocks' total returns. And the act of increasing a dividend often suggests corporate managers believe in a firm's ability to generate earnings and continued cash flow.

•Â Higher capital spending. Investments in plants and machinery help sustain growth over the long haul. Moreover, companies that increase capital spending, particularly during a sluggish economy, tend to be confident in their prospects.

•Â Reduced share count. Stock repurchases lower the number of outstanding shares, boosting per-share profits. Also, the fact that a company views its stock as a good investment may imply the shares are undervalued.

•Â Lower debt levels. Companies repaying and restructuring debt are strengthening their balance sheets and potentially reducing borrowing costs. Moreover, lower debt levels often translate to greater financial flexibility — a key competitive advantage.

•Â Increased spending on research and development. Companies that boost spending on product development make a positive statement about their commitment to growing sales.

Listed in the table below are 13 companies that satisfy at least four of the five criteria above. All 13 generate solid cash flow from operations. Over the last 12 months, all but one has raised its dividend, while most have seen increases in capital spending and expenditures on research. Four are reviewed below.

Applied Materials ($16; AMAT),  a maker of equipment used in the production of semiconductors, has run off five consecutive quarters of higher sales and cash provided by operations. It trimmed its share count 1% in the past year while lowering total debt 4%. Applied Materials raised its dividend 14% in March and now yields 2.1%. The company reported positive earnings surprises in each of the last four quarters and is projected to grow per-share earnings 88% and revenue 16% in the year ending October. Applied Materials, rated A (above average), is a high-quality company and a bellwether in the semiconductor-equipment space, but we prefer Lam Research ($55; LRCX), a Focus List Buy.


Bard ($100; BCR) produced a record $638 million in operating cash flow in 2010, more than double the cash it generated six years ago. Free cash flow totaled $5.49 per share last year, also an all-time high. Little of that cash sits idle on the balance sheet. An aggressive share-repurchase plan shrunk the share count by 6% in the last year. Capital spending rose 6% as Bard supplemented organic growth with acquisitions of smaller companies. In July, Bard paid $214 million for SenoRx, a maker of medical devices used to treat breast cancer, its biggest acquisition to date. The company also enjoys favorable trends for its 2011 estimates, which call for 14% higher per-share profits on a 7% sales gain. Bard is a Buy and a Long-Term Buy.


Stryker ($61; SYK) owes its rich balance sheet — net cash equaled $3.36 billion, or $8.51 per share, at the end of 2010 — to six straight years of higher cash provided by operations. During that six-year period, cash flow rose at a 17% annualized rate, while the dividend increased at a 37% pace. Last year, Stryker's spending on research and development rose a healthy 17%, while capital spending surged 39% to $182 million.

In January, Stryker closed on a $1.5 billion cash acquisition of Boston Scientific's ($7; BSX) neurovascular business, a unit with about $340 million in 2010 sales that specializes in brain-surgery products. The deal boosts Stryker's presence in the $900 million neurovascular market, currently expanding by roughly 10% a year. The purchase should help offset sluggish growth from Stryker's largest business, orthopedics, as patients delay procedures. Stryker is a Long-Term Buy.


Operating cash flow headlined Texas Instruments' ($35; TXN) strong 2010 results, rising in all four quarters and growing 45% to a record $3.82 billion for the year. That operating momentum coincided with higher capital spending on testing and manufacturing equipment, while the company invested another $199 million on acquisitions to expand manufacturing capacity in Japan and China. The company's recent $6.5-billion takeover deal for National Semiconductor ($24; NSM), reviewed in Portfolio Review, reflects TI's eagerness to grow.

For 2011, TI has budgeted $900 million for capital expenditures, an amount that exceeds levels spent from 2007 to 2009, and $1.7 billion for research and development. Seeking to protect its position in a highly competitive market, TI hopes those investments will lead to a new generation of semiconductors that let smartphones run multiple operating systems and take higher-resolution pictures. Over the last year, TI's capital spending jumped 59% to $1.20 billion, while spending on research and development increased 6% to $1.57 billion. TI is a Focus List Buy and a Long-Term Buy.

 

COMPANIES USING CASH FLOW WISELY
Below are 13 companies that have used their steady or improving cash flow to sustain growth and reward shareholders. All 13 earn above-average Quadrix scores for Quality and Overall. An A rating means above-average, while a B implies average. Among the A-rated stocks, those presented in bold are recommended for purchase.
----------------- Dividend -----------------
------------- Trailing 12-Month Change -------------
-- Quadrix Scores --
Company (Price; Ticker)
Per
Share
($)
Yield
(%)
12-Mo.
Chg.
(%)
No. of
Increases
(5 Yrs.)
Capital
Spending
(%)
Research &
Development
(%)
Shares
Outstanding
(%)
Total
Debt
(%)
Quality
Overall
Rating
3M ($93; MMM)
2.20
2.4
3
5
21
11
1
(5)
75
80
B
Applied Materials
($16; AMAT)
0.32
2.1
14
4
(39)
18
(1)
(4)
83
99
A
AstraZeneca
($47; AZN)
2.55
5.4
15
5
(18)
21
(2)
(17)
84
85
B
Bard ($100; BCR)
0.72
0.7
6
5
6
3
(6)
552
87
86
A
Intel ($20; INTC)
0.72
3.7
12
5
15
16
1
(5)
86
95
A
Stryker ($61; SYK)
0.72
1.2
152
4
39
17
(1)
NM
89
89
A
Target ($51; TGT)
1.00
2.0
27
5
23
0
(6)
(6)
74
69
B
Texas Instruments
($35; TXN)
0.52
1.5
9
5
59
6
(5)
0
91
98
A
TJX ($51; TJX)
0.60
1.2
21
5
65
0
(5)
(1)
92
87
A
Union Pacific
($98; UNP)
1.52
1.6
21
4
4
NM
(2)
(6)
88
79
A
United Technologies
($85; UTX)
1.70
2.0
10
5
5
12
(2)
6
74
59
B
Varian Medical
Systems
($69; VAR)
0.00
0.0
NM
0
60
5
(3)
(36)
93
78
A
Visa ($76; V)
0.60
0.8
19
2
1
NM
(3)
(23)
91
93
A
Note: Quadrix scores are percentile ranks, with 100 the best.    NM Not Meaningful.

 


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