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||285%||316%||354%|
|Earnings per Diluted Share||($0.07)||($0.36)||$0.73|
Source: S&P Capital IQ, data as of market close Sept. 24, 2012.
No. 6: Rambus
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
No. 5: Panning NxStage Medical
No. 4: Staffing company On Assignment
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!