A little more than a year ago, I wrote about a number of companies that do an excellent job of generating free cash flow and have the proof via their strong free cash flow, dividend payments, and solid balance sheets.
Many mature consumer products companies such as Procter & Gamble (NYSE:PG) fit this mold, but the company that was the primary focus of that article was Motley Fool Hidden Gems selection CNS (NASDAQ:CNXS). And after I looked at CNS' first-quarter earnings, it appears the cash generation abilities of the business are still very much intact. Diluted earnings per share were up 134%, and sales were up 32%. More importantly, there was strong growth across all of its product lines, domestically and internationally, and gross, operating, and net margins were all up solidly against last year's performance.
I'm most impressed with the improvements in the company's Fiber Choice brand. Having tried the product and liked it myself, I'm not totally shocked, but I did not expect 107% year-over-year growth. The company attributes much of the growth here to its improved marketing campaigns and expects that it can continue to drive further growth with its marketing and new product introductions in the Fiber Choice line.
There are a couple of points to which shareholders should pay close attention in the near future. The company sounds eager to broaden its product offering beyond its core product lines and is hinting that it will make an acquisition to do so. Shareholders will want to make sure that management keeps operating on an even keel and doesn't feel compelled to do something just for the sake of being active. In fairness to CNS, it has not shown such compulsiveness in the past, but it would not be the first management team that felt it had to keep the growth story alive.
When CNS was originally recommended in Hidden Gems, it was a company that had solid operations and growth potential but traded at a very low multiple of its free cash flow, and no growth was priced in. Factoring in today's results, the company trades at a trailing multiple of about 26 times earnings but has a more reasonable enterprise value-to-free cash flow ratio of about 19.
That's the big difference with CNS now. The market is pricing some of the potential forward growth into the shares, and that means the margin of safety is basically gone. For those who have owned this company for a long time, I see little harm in holding, particularly if you believe -- as I do -- that the company can continue to grow at low-double-digit rates for the next couple of fiscal years. But I'd caution against making large purchases at today's prices.
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Nathan Parmelee has a beneficial interest in shares of CNS but has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
