Although many investors look to technology stocks for their growth potential, there are quite a few that offer the strong free cash flow that many value investors find attractive.
Measured as the cash a company generates from its operating activities, less the cash it spends on new property and equipment, free cash flow represents the money that can be used to fuel growth opportunities or to repay shareholders via dividends or share buybacks. Dividing free cash flow by market cap gives the free cash flow yield. The higher the yield, the more money the company can invest in growth or for payouts to investors. And those are good things.
Even some of the widely followed large-cap tech names offer attractive free cash flow yields. For example, the trailing-12-month free cash flow yield at Apple (NASDAQ:AAPL) is 4.1%. Intel (NASDAQ:INTC) boasts a 6.1% free cash flow yield, Microsoft (NASDAQ:MSFT) yields 7.2%, and Cisco Systems (NASDAQ:CSCO) yields 6.6%.
What about the little guy?
On the thesis that even greater values may be found among the lesser-followed names, I took a look at a number of technology companies to find the ones with the best free cash flow yields. Keep in mind, though, that the high cash flow yield is often because the stock has dropped in price -- so it's important to keep the risks in mind if you're considering these as potential investments.
Acxiom (NASDAQ:ACXM) has been a victim of the credit crunch. In October, a planned private-equity buyout fell through, and the stock has since lost half of its value. However, in the past 12 months, its $263 million in free cash flow amounted to a whopping 29% of its current market capitalization.
More impressively, this is no one-off event. Acxiom's free cash flow has exceeded $200 million in each of the past five years. Although earnings estimates have been declining, the company is still expected to earn $0.75 per share in the fiscal year ending in March 2009. The price, at 15 times earnings, isn't particularly cheap. However, the free cash flow offers a nice buffer.
A warning
Keep in mind that cash flow can sometimes be fleeting. For example, until just recently, smartphone specialist Palm (NASDAQ:PALM) looked like another cash flow machine. In the 12 months ended in November 2007, it generated $106.5 million in free cash flow, which was sufficient for a 16.8% yield against the current market cap. It also showed that it wasn't afraid of using its cash flow to pay back investors: It recapitalized in October and paid out a special $9-per-share dividend.
However, tough competition from Research In Motion and Apple has taken a toll. Negative cash flow from operations in the quarter that ended in February was no match for the quarter that ended in November, Palm's strongest for cash flow generation. Rolling the strongest quarter off last year's numbers and replacing it with a weak quarter this year has resulted in a trailing-12-month cash flow just north of zero.
One more nugget
Finally, Amkor (NASDAQ:AMKR) generated a 20% free cash flow yield over the past 12 months. What's more, the earnings estimates for this semiconductor packaging and test-services subcontractor have been generally rising recently, so it's somewhat puzzling that the valuation remains so cheap relative to cash flow.
One possible explanation is that investors have not yet caught on to a dramatic turnaround at Amkor. Once a debt-laden cash-flow destroyer, the company has shown positive cash flow and significant debt reduction over the past two years. If those trends continue, investors may have to re-evaluate their opinion of the company.
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