Of 10 companies whose stock-based compensation over the last 12 months is 100% or more of operating cash flow, the ones below make the companies on yesterday's list appear merely brazen. In our countdown of offenders, Nos. 6, 5, and 4 are eye-rubbingly unbelievable.
These companies produce positive OCF, sure. But not only is it all comprised of adding back stock-based compensation -- the estimated value of stock options granted -- from the income statement, it's worse. By adding back this comp, these companies act as if it will never have any value when actually they are issuing IOUs of investor money. They get away with it ("Wow, this company is really printing the green!") because nobody looks at the cash flow statement.
You will. Here.
Cash Flow Statement (all TTM, $ in millions)
No. 6: Rambus
No. 5: NxStage Medical
No. 4: On Assignment
|Stock-Based Comp as % of OCF
|Earnings per Diluted Share
Source: S&P Capital IQ, data as of market close Sept. 24, 2012.
No. 6: Rambus (Nasdaq: RMBS ) . Rambus has been one of the most controversial semiconductor intellectual property development and licensing companies of the last 13 years. It's spent a lot of money and time suing and being sued by chip makers, especially Micron Technology (Nasdaq: MU ) . Rambus has claimed patent infringement and royalties due, with the other side of course saying "no way."
In the latest skirmish, a judge found that chip maker SK Hynix infringed Rambus patents and would pay damages. He did agree with the chip makers that Rambus destroyed documents, but also thought that Rambus didn’t "deliberately" shred those "it knew to be damaging."
Almost entirely throughout its history as a public company, not just in the last 12 months, Rambus has produced OCF primarily from adding back stock-based comp. With comp at a huge 285% of TTM OCF, I say stay off this bus, for now. But if you are a growth investor interested in companies that license their advanced chip technology, consider debt-free and growing ARM Holdings (Nasdaq: ARMH ) . Its growth may justify high valuation multiples because its technology powers the unpopular and low-selling (I jest!) Apple iPhones, computers, TV, and iPads. Companies aren't suing but rather using and paying ARM.
No. 5: Panning NxStage Medical (Nasdaq: NXTM ) as an investment is almost like objecting to children, dogs, and flowers -- its medical devices that aid kidney dialysis patients surely benefit people in lifesaving ways. But investing in the stock or not does not impact those patients -- the company's ability to serve those who provide services to the patients does. And this company isn't GAAP-profitable; its devices don't make money. Until the company does, its customers and ultimate end users, the patients, are in a precarious position. Sell or avoid this stock: Its next stage may be -- this is awful, but here I go anyway -- end-stage.
No. 4: Staffing company On Assignment (NYSE: ASGN ) specializes in the life sciences, health care, and IT and engineering industries, including staffing for lab professionals, nurses, doctors, and techie geeks (all of whom we would be in serious trouble without). And wowie zowie, has it rewarded investors in the last year or so, from the low $6s to around $20 recently. Who wouldn't take that? Well, if I were you, I'd take it and I'd leave it. It may have GAAP EPS, but it doesn't produce any real cash.
With stock-based comp at an eye-popping 316% of OCF, On Assignment and its stock are floating on speculative air. I wouldn't take this assignment. Better staffing companies include Kelly Services, with a pristine balance sheet and a low EV/EBITDA multiple.
Tomorrow, the countdown continues with the last and worst offenders, Nos. 3 to 1. And their percentages are unconscionable. Be there to avoid losses!