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 such as:
- 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 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.
So, with these lessons deeply ingrained in your Foolish subconscious -- or maybe just bookmarked as a "favorites" page -- I'll today highlight three more cash-flow rulers of our Motley Fool CAPS kingdom. Unlike Parkervision
So, sound the trumpets! Here's another trio of Cash Kings from CAPS.
|
Company |
Cash King Margin |
CAPS |
CAPS |
|---|---|---|---|
|
Check Point Software Technologies |
56% |
97 |
9 |
|
Ceradyne |
16% |
779 |
19 |
|
Activision |
15% |
870 |
32 |
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-generating kings and what some of their loyal CAPS followers think about them.
Point taken
With an impressive free cash flow-to-sales margin of more than 50%, Check Point takes the honors as this week's most prolific cash king.
As a worldwide leader in security software solutions, Check Point has the dominant market share (more than 90% of the VPN/firewall space), exposure to favorable trends (since security is becoming a priority for most firms), and an impressive roster of clients -- which includes the entire Fortune 100 -- to keep its coffers stuffed with cash.
And, despite increasing competition from the likes of Cisco
CAPS All-Star NetscribeSoftwre attempts to keep us in Check:
... if we look closely at the current performance, excluding the special non-recurring items, the bottom line has actually observed a healthy growth, as a result of strong synergies offered by the acquisitions. Further, considering the sturdy growth in deferred revenue levels, increased product portfolio and positive data security market outlook, Check Point appears to be a good investment.
Sultan of ceramics
The next monarch on our list is Ceradyne, a leading developer of specialty ceramic products. For the past couple of years, Ceradyne has applied unique technology to the defense (armor protection), industrial (semiconductor processing), and automotive markets (engine components), to generate healthy cash flows for its shareholders.
And as my Foolish colleague Rich Smith recently mentioned, Ceradyne's growth prospects look promising as it enters the solar and nuclear power industries.
CAPS player tcufrog1999 explains the ceramic advantage:
CRDN is the leader in ceramic body armor and related technology. A variety of factors make ceramic better than traditional materials such as steel, including better durability, lighter weight and more flexibility. While they have dominated this market (body armor), there are numerous other industrial applications for its ceramic materials technologies.
A CAPS call to duty
Our last free cash flow ruler this week is Activision, a leading publisher of video-game software and a two-time selection of our Motley Fool Stock Advisor service. The stock is up a whopping 103% and 409% since the first and second recommendations, respectively, but our CAPS community believes there's plenty of room to run.
Currently, Activision is developing three launch titles for the PlayStation 3 and Nintendo Wii: Call of Duty 3, Tony Hawk, and Marvel: Ultimate Alliance. Couple those new releases with the ever-increasing popularity of its other franchises such as Guitar Hero, Spider-Man, and True Crime, and you can see that our CAPS Fools might be on to something.
CAPS player DigitalOZ communicates his vision:
Activision is a well established, high-quality game manufacturer in a market that is set to grow for years to come. They are well positioned because they are diversified in the kinds of games they make and platforms they support; they have money in the bank; and they have no debt.
The Foolish bottom line
Free cash flow-generating companies like Check Point Software, Ceradyne, and Activision 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 time, when I'll feature three more cash kings from CAPS. Until then, may your cash flow reign supreme.
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.
