3 More Kings of Cash

It's a brand-new year, which means there will be no shortage of stock market prognostications in the financial media anytime soon. Of course, as Foolish investors, we know the truth -- there's just no reliable way to predict what stocks will do over the short run. After all, Mr. Market isn't called a manic-depressive idiot for nothing.

Regardless of what the stock market does over the next few months, the next year, or even the next couple of years, our long-term returns aren't dictated by the market's daily mood swings. Instead, they're ruled by our portfolio's ability to generate one thing -- cash.

A Fool's guide to free cash
Investing, after all, is about putting money up front today to get more of it in return tomorrow. Here at the Fool, we're firm believers that free cash flow, as opposed to traditional accounting earnings, is the best gauge of a firm's profitability (or lack thereof). You can learn more about the importance of free cash flow here.

So with those cash flow lessons deeply ingrained in your Foolish subconscious -- or maybe just bookmarked as a "favorites" page -- I'll highlight three cash-cow favorites of our Motley Fool CAPS community.

I'll simply screen for companies with free cash flow-to-sales margins above 15% (also known as the Cash King Margin) that our community is overwhelmingly bullish about as well. The Cash King Margin is a good way to account for size differences among companies, rather than just using an absolute level of free cash flow.

Cash rules everything around them
Unlike companies such as Evergreen Solar (NASDAQ:ESLR), Pacific Ethanol (NASDAQ:PEIX), and Trump Entertainment (NASDAQ:TRMP), which struggle to keep the cash from gushing out of their corporate windows, these companies have it practically flooding the mailrooms.

So, let's not waste another second. Sound the trumpets! Here's 2007's first trio of Cash Kings from CAPS:

As always, don't consider these stocks as formal picks but rather as suggestions worth further investigation.

Aside from free cash flow, there are obviously a ton of other things investors need to take into consideration about a prospective investment, from the character of its management to the valuation of its shares. After all, due diligence is the Fool's way to riches.

But just for starters, here's a quick summary of the stories behind these cash-throwing stocks, and what some of our CAPS members are saying.

The credit king
With a whopping free cash flow-to-sales margin of more than 25%, Motley Fool Inside Value recommendation First Data Corp. takes the honors as this week's most prolific cash king. As the leading processor of credit and debit card payments in the U.S., this is one king that has the economic power, scale, and growth opportunities to generate impressive cash flow for the new year and beyond. When consumers pay with plastic, this king gets paid with paper.

After its successful spinoff of Western Union (NYSE:WU) in 2006, the "new" First Data continues to be well-positioned in its existing business segments -- Commercial, Financial, and International Services. As fellow Fool John Finneran writes in a year-end review, First Data's superior ability to throw cash combined with a reasonable valuation make the company a strong investment candidate.

CAPS All-Star pickthis is another Fool who's impressed with the credit king's fundamentals:

"Great free cash flow yield. More of a growth play than what I normally look for but the cash flow is what's driving my recommendation. Balance sheet is clean as well, leaving room for 'shareholder friendly actions.'"

Grandmaster cash
Shuffle Master is another powerhouse that uses proprietary technology and market dominance to generate healthy cash flows. The Las Vegas-based developer of gaming products hoards the market share for automatic shufflers and chip sorters, has a shareholder-friendly management that continues to buy back shares, and generates a significant portion of its revenue overseas -- all of which are reasons why the company was selected by our Motley Fool Stock Advisor service.

For 2007, the company expects to grow both revenues and earnings at a 25% clip -- an ambitious goal by normal standards. However, since almost half of Shuffle Master's revenues are of a recurring nature, I wouldn't be surprised if this king went on to trump those expectations in the new year.

CAPS All-Star vevyvevyvicket is just one of many loyal believers in the Shuffle Master kingdom:

"Given that management has been outstanding and they haven't been dilutive, I have faith in this stock doing really well in the coming years. Also their aggressive share buybacks are a good sign. Right now, this is a growth stock at a cheap price."

Captain Morgan the conqueror
Our last free cash flow king this week is Diageo, the leading producer and distributor of premium spirits, wine, and beer. With an unmatched roster of brands that includes Guinness, Bailey's, Smirnoff, and Captain Morgan, Diageo clearly has the recognition and pricing power to generate tons of cash for many years to come.

It's that type of brand awareness and financial flexibility that has made Diageo a favorite in our CAPS community, not to mention a formal pick of our Motley Fool Income Investor service (I told you we're Fools for free cash). The company also sports a 3.6% dividend yield, profit margins of 20%, and a return on equity in excess of 30%. This is one king that truly knows how to rule its industry with an iron fist full of cash.

CAPS All-Star chk999 states a simple reason why investors should bow to the great Diageo:

"They sell booze. This is the most recession proof product. They are profitable and seem to be well run. They pay a dividend. What's not to like?"

The Foolish bottom line
Free cash flow-generating companies like First Data, Shuffle Master, and Diageo are always among my top candidates to research further. Our Motley Fool CAPS intelligence database is a great place to look for your own Cash Kings, read what fellow Fools think, and even voice your own opinion about your favorite stocks. Click here to join the forward-thinking CAPS community free of charge.

That's all for this week, Fools! Be sure to join us next week, when I'll feature three more cash kings from CAPS. Until then, may your 2007 get off to a fast and free-flowing start.

Fool contributor Brian Pacampara always ends the holidays with zero free cash flow and holds no position in any of the companies mentioned. Western Union is an Inside Value pick. The Fool's disclosure policy always rules throughout the year.