Welcome back to the world of the Cash Kings, where we highlight businesses that generate a healthy dose of free cash flow. Why is cash flow so important? Because it gives management the opportunity to boost shareholder value through actions like:
- Paying dynasty-building dividends.
- Buying back shares at attractive prices.
- Growing the business organically without having to borrow money or sell shares.
A Fool's guide to free cash
Investing, after all, is about putting money up front today in order 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 health and profitability (or lack thereof).
So, with these cash flow lessons deeply ingrained in your Foolish subconscious -- or maybe just bookmarked as a "favorites" page -- I'll highlight three more cash-flow rulers of our Motley Fool CAPS kingdom.
Unlike General Motors -- a cash-burning company that CAPS generally dislikes -- these are businesses with free cash flow-to-sales margins above 15% (also known as the Cash King Margin), that our community is overwhelmingly bullish about.
So, sound the trumpets! Here's another trio of Cash Kings from CAPS:
|
Company |
Cash King Margin (TTM) |
CAPS Bulls |
CAPS Bears |
|---|---|---|---|
|
Gilead Sciences |
36% |
394 |
21 |
|
Covanta Holding |
20% |
51 |
3 |
|
Baxter International |
16% |
92 |
8 |
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 these cash-throwing kings, and how some of their loyal CAPS followers feel about them.
Follow the Gilead-er
With a whopping free cash flow-to-sales margin of more than 35%, Gilead Sciences takes the honors as this week's most prolific cash king. As the world's leader in HIV treatments, Gilead's dominant franchise of products (Altripla, Truvada, Viread, and Emtriva), lengthy patent protection, and potent partnership with Bristol-Meyers Squibb
In addition, CAPS player NetscribeBiotech says that an attractive ownership breakdown makes Gilead a fine prescription for market underperformance:
... at the end of the day it is a resource rich company with stable products and strong cash flows. Its investor profile also seems to be strong with institutional investors holding around 90% of the outstanding shares. Thus this stock might attract buying from portfolio investors and hence may outperform.
King of conversion
Covanta Holding, the country's dominant operator of waste-to-energy (WTE) facilities, is a ruler that utilizes the country's trash to print cash. Through its 51 energy-generation facilities, Covanta provides waste removal services for municipalities, and then efficiently converts that same garbage into renewable energy -- getting paid every step of the way.
Thanks to its strong competitive position and fascinating, cash-spewing business model, CAPS All-Star TJones97 thinks Covanta shouldn't go to waste:
A leader in the waste conversion field. I can't think of a better business model: people pay them to take trash and then people pay them for the energy they produce from converting the waste! A double edged sword.
Medical magnate
Our last free cash flow king this week is Baxter International, one of the world's largest medical suppliers. The company's three segments -- BioScience (hemophilia treatment), medication delivery (vials, syringes, etc.), and renal (dialysis products) -- are all leaders in their respective fields, while an aging population coupled with continued innovation should drive substantial growth in the future.
A month ago, CAPS All-Star mwolf12 wrote a pitch about Baxter's valuation. The shares have moved up slightly since then, but much of this bullish BAX call looks to have remained intact:
I like companies that are inexpensive and have consistency in earnings growth and sales. BAX is such a company. ... [At] first blush BAX doesn't appear to be cheap with a PE of 24.7, but compared to its industry peers, BAX could easily trade at a 30-35. As a bonus, sales are accelerating and BAX also gives a dividend and has exceptional margins.
The Foolish bottom line
Free cash flow-generating companies like Gilead Sciences, Covanta Holding, and Baxter International 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 or read how your fellow Fools feel about thousands of different stocks.
Click here to join the forward-thinking CAPS community free of charge.
Be sure to join us next week, when I'll feature three more cash kings from CAPS. Until then, may your cash flow reign supreme.
For more Foolish usage of free cash:
Make seven picks on CAPS by April 24, and we'll send you a free copy of The Motley Fool Five-Star Report. Inside, you'll discover how to use CAPS as a research tool, and you will receive a recommended five-star CAPS pick poised to beat the market for the next decade or more -- one that you can easily translate into profits for your real-world portfolio. Click here to get started now!
Fool contributor Brian Pacampara owns no position in any of the companies mentioned. The Fool's disclosure policy is the strict set of rules that always rules Fools.
