3 Kings of Cash

Just flip on the television, and there's a good chance you'll soon find yourself watching an advertisement for an entertaining, get-rich-quick stock scheme. You know, the ones that promise overnight wealth through the use of red-light/green-light trading systems, highly leveraged options trading, or even extremely leveraged foreign exchange "investing." Sounds like a no-lose situation right? Eghh!

No matter how anyone advises you to slice it, dice it, or trade it, the most tried, tested, and true way to beat any market is to own great companies that produce one crucial thing -- cash.

A Fool's guide to free cash
After all, investing 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 engrained 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 Kings rule
Unlike a company such as Pier 1 Imports (NYSE:PIR) that have the cash gushing out of its corporate windows, these companies have it practically flooding the mail rooms.

So, let's not waste another second. Sound the trumpets! Here's another trio of cash kings from CAPS:

As always, don't consider these stocks as formal picks but rather as suggestions worth further investigation. 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 kings, and what some of our CAPS players feel about them.

Flashmaster's cash
With a whopping free cash flow-to-sales margin of over 30%, Adobe Systems takes the honors as this week's most prolific cash king. As one of the most recognized software companies in the world, this is one ruler who has the unique product offering, annoying switching-costs (for its users), and growing market opportunity within digital photography and video to keep its fortress flush with cash.

Adobe's acquisition of Macromedia in 2005 -- whose products include Flash and Dreamweaver -- allows the company to leverage its market leading software even further by offering value-added, bundled packages. The newest version of the company's signature bundle, Creative Suite, is set to roll out in early 2007 and should provide even more cash to fund its digital dynasty.

CAPS All-Star jmacn22 is just one Fool who is weaving dreams of market-beating returns:

"Sales will continue to come up light in the short-term until it launches CS3 (Creative Suite) in the spring of 2007. But after that date we should also see the benefits of a fully integrated Macromedia, and the combination of which should make this an outperformer over the next few years."

Free cash checks
CheckFree is another free cash flowing king that rules its industry to the benefit of its people, err, shareholders. Specifically, it uses massive scale advantages, error-free execution, and a low-price offering within the electronic bill-payment market to generate superior returns and free cash flow.

CheckFree's revenues have also grown at a compound annual growth rate of over 14% during the past five years, while operating margins have increased substantially due to its high degree of operating leverage. In my books, this king offers a smart way to play the growth of the electronic bill-payment market as consumers increasingly use the Internet to settle their dues.

Despite a few concerns over the quality of its management, CAPS All-Star weiwentg bows faithfully to CheckFree's billing blessings:

"I think CheckFree has a wide moat and great growth prospects, especially as banks push customers to use online banking and bill payment. They generate 5x as many transactions as their nearest competitor, giving them economies of scale that competitors can't duplicate."

A king that makes the pace
Our last free cash flow king this week is Medtronic, one of the world's largest medical-device companies. With leadership positions in several categories such as cardiac rhythm management, vascular, and neurological surgery, this medical monarch uses an exceptional (and proven) knack for innovation to dominate its rivals.

Medtronic's promising pipeline, coupled with an already nicely diversified product line -- that ranges from pacemakers to bone growth inducers -- put the company in a great position to capitalize on favorable demographic trends. In addition, Medtronic itself is in immaculate health with more than enough free cash flowing in to cover its obligations.

It's that type of dominant market share, unique ability to alleviate pain, and financial strength that gives our CAPS community a healthy feeling about the company's prospects. Investor weiwentg helps us out yet again -- this time giving us his heart-filled diagnosis on Medtronic's long-term portfolio fitness:

"Medtronic is a very well-run, innovative, diversified medical device maker, which has significant market share in heart devices, spinal products, and insulin pumps. ... MDT's returns on invested capital are more than double its cost of capital. This should be a great franchise to own over the next ten years, maybe more."

The Foolish bottom line
Free cash flow-generating companies like Adobe Systems, CheckFree, and Medtronic 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 free cash flow propel you to get-rich-slow.

Foolish contributor Brian Pacampara tried to get rich quick but never became an American Idol (or any other type of idol for that matter). He holds no position in any of the companies mentioned. The Fool's disclosure policy is the strict set of rules that always rules Fools.