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All Contents © 2017The Kiplinger Washington Editors
By Vince Martin
| August 2017
Cash is king, as the old saying goes, and it’s an often overlooked metric by many investors when they’re analyzing potential stocks to buy.
Cash certainly comes in handy on a corporate balance sheet. Companies with lots of cash and little or no debt not only often have much lower risk than their leveraged peers, they usually have more opportunities to use the cash, too — whether through acquisitions, share repurchases or dividend payments to shareholders.
For investors who see value in companies with large amounts of cash, here are 10 stocks to buy based at least in part on their significant stores of cash on the books, and otherwise strong balance sheets.
I’ll also explore some of the potential ways they could use that cash.
Prices and data are from the original InvestorPlace story published on August 16, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Cash and investments: $1.1 billion
Capacitor manufacturer AVX Corporation (AVX) actually has put some of its cash to work already, with plans announced in July to buy a division of TT Electronics (TTGPF) for $155 million. But even after that deal, AVX still has nearly a billion dollars in the bank.
And more M&A seems likely.
AVX does hold much of its cash overseas, making it a prime beneficiary if a repatriation holiday is passed over the next couple of years. But the company can’t do much in terms of share buybacks, which are limited by the 72% stake held by majority owner Kyocera Corp (KYO).
AVX could boost its dividend, which yields 2.6% at the moment. And it may need to keep some cash around to manage possible environmental litigation relative to a long-ago predecessor company — one major risk to the stock. But it also seems highly likely that at least one more deal is on the way as AVX positions itself for increased capacitor demand from the Internet of Things and automotive markets.
Judging by the response to the last deal — which sent shares to a post-crisis high — that’s a good reason to take a long look at AVX.
Cash and investments: $35.5 billion
Facebook Inc. (FB) ended its second quarter with more than $35 billion in cash — and zero debt. And that cash is just part of the reason FB stock still looks extremely attractive, even near all-time highs.
In terms of what Facebook CEO Mark Zuckerberg plans to do with the cash, it’s unclear at the moment. Facebook is generating more cash every quarter, including nearly $8 billion in just the first half of 2017. The company did announce a $6 billion repurchase program late last year, but it’s generating more than that amount in cash already … meaning Facebook could add a dividend as well.
An acquisition could be in play down the line, particularly if Facebook wants to make a splash in video. That said, the company still has work to do in monetizing WhatsApp and Instagram. For now, it seems likely that Facebook will keep its options open.
But increased shareholder returns seem the most likely outcome unless Zuckerberg decides to make a major strategic move.
Cash and investments: $2.2 billion
First Solar, Inc. (FSLR) unquestionably is a high-risk, high-reward play. U.S. solar manufacturers like First Solar and SunPower Corporation (SPWR) have struggled with foreign competition and declining prices.
But there’s reason for optimism in the near-term, with the potential for tariffs on solar cells after bankrupt Suniva petitioned for such duties earlier this year. Those duties could protect First Solar and SunPower — but there’s also a fear that they could increase the price of cells to the point that the entire U.S. solar industry slows.
Either way, First Solar’s nearly $2 billion in net cash likely will come in handy. It provides a buffer against a downcycle in an industry where a number of U.S. competitors have gone bankrupt. On the other hand, First Solar could use the cash to make an acquisition, either of another manufacturer or in an adjacent industry like storage.
At the least, with more cash coming in from the likely sale of its stake in 8Point3 Energy Partners (CAFD), First Solar will have no shortage of options.
Cash and investments: $305 million
Netgear, Inc. (NTGR) probably has too much cash at this point. The company remains consistently profitable, yet has about $9 per share in cash on the books.
The bear case for NTGR, and a key reason it hit a 52-week low back in May, is based on fears that its business is in long-term decline. The company’s business of selling routers to service providers like Comcast Corporation (CMCSA) has taken a hit from cord-cutting. The move by Alphabet Inc. (GOOGL) unit Google into “mesh” Wi-Fi adds a well-funded competitor for the consumer wireless business as well.
But Netgear has a huge hit on its hands in its Arlo smart cameras. And while margins are taking a hit in the second half due to higher marketing spending, its high-end Nighthawk routers are growing, its own mesh business is outperforming Google already, and Arlo could propel 2018 EPS over $3 per share.
That cash could make NTGR an attractive takeout target, with the balance sheet looking ripe for a leveraged private equity play in a market where “cheap,” consistent cash flow generators are either hard to find and/or overvalued.
Netgear is probably best suited at this point to buy back shares. But a buyer could find its own uses for that cash.
Cash and investments: $241 million
Fragrance manufacturer Inter Parfums, Inc. (IPAR) — which is behind brands such as Bebe, Coach, Jimmy Choo and Mont Blanc — is in an interesting spot.
Back in 2012, Burberry Group (BURBY) ended its licensing deal with Inter Parfums. As a result, Inter Parfums received a reasonably large termination payment — and was left with a large revenue hole from losing its largest product.
Rather than cut costs to match that lost revenue, Inter Parfums simply plowed ahead, looking for new products to launch or acquire to regain those lost sales. But it’s been somewhat slow going, save for the purchase of Rochas from Procter & Gamble Co. (PG).
But the good news is that the current portfolio is performing well, with 2017 EPS guidance of $1.25-$1.27 implying ~18% growth year-over-year. And Inter Parfums still has the cash — almost $8 per share total, and $5.50 per share net — to buy another brand which it can tack onto its existing operating structure with little incremental expense. Management continues to work on that M&A front.
A long-awaited major deal could drive IPAR even beyond current levels near $40 — near the stock’s all-time high set last month.
Cash and investments: $262 billion
To be honest, I’m personally still a bit skeptical of Apple Inc. (AAPL), particularly with it trading near an all-time high. The company remains heavily reliant on the iPhone, despite efforts to grow the rest of the business. And I worry that reliance will cause profits to decline at some point in the not-too-distant future.
But for investors who value strong balance sheets, it’s tough to find a better stock in the market. Apple has a stunning $262 billion in cash and investments, and net cash and investments of about $165 billion. And it seems increasingly likely at some point that Apple will use that cash for a large acquisition, most likely in its Services business.
One thing that’s certainly in the offing is a reported $1 billion push into original content that will pit it against the likes of Netflix, Inc. (NFLX) and Hulu.
Apple has been a speculated buyer of companies ranging from Walt Disney Co. (DIS) to the aforementioned Netflix, but hasn’t yet pulled the trigger on a big deal. (Its largest acquisition so far was the $3 billion purchase of Beats Music in 2014.) But a big M&A play likely is coming soon, given CEO Tim Cook’s announced target of doubling services revenue to roughly $50 billion in four years.
Apple isn’t quite capable of creating that growth on its own. It likely will have to spend some of the cash — and very well could wind up spending big.
Cash and investments: $622 million
In a tough U.S. apparel environment, Columbia Sportswear Company looks like a winner. The business still is driven by American wholesale revenues of its namesake brand. But international expansion, a direct-to-consumer buildout and a growing stable of small brands all are helping growth as well.
Columbia has more than $600 million in cash and no debt. And it has plenty of uses for that cash. The company is opening new stores in the U.S. It’s making a push internationally. And after the 2014 acquisition of prAna, Columbia can pick up additional smaller brands to expand its stable in the growing outerwear category.
Columbia isn’t a torrid grower, and a valuation around 20 times the midpoint of 2017 EPS guidance might not suggest a huge breakout. But this is a stable business built on a hugely valuable brand — and one whose balance sheet provides more options to drive shareholder value. That’s an attractive combination.
Cash and investments: $2.1 billion
Sina Corp (SINA) has more than $2 billion in cash on its books, modest debt and a 46% stake in Weibo Corp (WB), the social media business it spun off in 2014. And the easy argument for SINA stock is that those assets alone are worth more than a current $7 billion market cap.
In fact, Sina’s stake in Weibo should be worth in the neighborhood of $9 billion alone. That doesn’t include the cash on the books, or the value of Sina’s struggling portal business, which has made a bit of a rebound in the past few quarters.
To its credit, Sina is trying to close the valuation gap somewhat. It continues to distribute WB stock directly to its shareholders, releasing about 3% of Weibo in a distribution last month. It has a $500 million share buyback underway. The smartest course of action appears to be to continue those shareholder-friendly efforts, in a move to get the market value of SINA stock closer to the sum of the parts valuation.
And with Alibaba Group Holding (BABA) a potential acquirer of both Sina and Weibo down the line, the more Sina uses its cash — and stock — to reward shareholders now, the greater the rewards could be in the future as well.
Cash and investments: $107 million
Spok Holdings Inc. (SPOK) is a company in an interesting position. The company was formerly known as USA Mobility, and its core business is providing pager services to healthcare companies, primarily hospitals.
That seems like it would be a declining business — and it is. But it’s declining slowly, and still generating impressive free cash flow. Spok has used the cash flow from that “melting ice cube” to pay out a substantial amount of dividends and create a fortress balance sheet. Spok has more than $5 per share in cash and no debt against a share price under $17.
In the meantime, Spok acquired a software provider earlier this decade, and management has said it’s on the lookout for at least one more deal. That software business is starting to show some strength, supporting longer-term hopes that it eventually can supplant the wireless business as the company’s profit center.
There are some risks here, as moving into a “new” business often is easier said than done. But strong, experienced management and the $5-plus per share in cash both mitigate those risks. And with a nearly 3% dividend, SPOK shareholders can get paid to wait in the meantime.
Cash and investments: $225 million
Stocks in the mall retail space have been decimated over the past year-plus. But American Eagle Outfitters (AEO) looks like the proverbial baby tossed with the bathwater. At $11.50, AEO stock trades near multiyear support, and a 4.6% dividend and more than $1 per share in cash both seem to mitigate the risks here somewhat.
Those risks are real. Mall traffic is declining. Promotional activity is intense, potentially pressuring margins. But American Eagle’s Aerie concept is a real growth engine. Same-store sales for Aerie rose a whopping 25% in the second quarter.
And the balance sheet provides American Eagle some flexibility. AEO traditionally has been aggressive repurchasing shares. Aerie is one of the few brick-and-mortar concepts left looking to grow, rather than shrink, its footprint. AEO even kicked the tires on rival Abercrombie & Fitch Co. (ANF) earlier this year.
There are reasons for concern relative to AEO. But the balance sheet is a big reason why it might be worth trying to time the bottom here.
This article is from Vince Martin of InvestorPlace. As of this writing, Vince Martin was long NTGR.
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