Here at the Fool, we look for companies that are not only producing and growing earnings, but are producing and growing cash. After all, it's cash that lets a company reinvest in future growth and it's cash that we investors receive through dividends and share repurchases.
To find companies generating the green stuff that might make good investments, I set up a simple screen:
- First, I wanted companies earning at least 15% on equity. These are more likely to be producing shareholder value rather than destroying it.
- Then I wanted companies trading at, or less than, 10 times free cash flow. These are bringing in the cash, but are possibly being underappreciated by the market.
This simple screen gave me 61 different names today from among the members of the S&P 500 index. Here are three that caught my eye:
|
Company |
ROE (ttm) |
Free Cash Flow |
Price-to-FCF |
|---|---|---|---|
|
Freeport-McMoRan Copper & Gold (NYSE: FCX) |
43.2% |
$5,174 |
5.99 |
|
Micron Technology (NYSE: MU) |
23.5% |
$1,370 |
6.22 |
|
International Business Machines (NYSE: IBM) |
77.1% |
$17,218 |
9.53 |
Source: Capital IQ, a division of Standard & Poor's; ttm = trailing 12 months.
Freeport may not be the biggest miner, but it has some of the best operating and net margins among its competitors at 47.3% and 21.4%, respectively. This edges out Newmont Mining's (NYSE: NEM) 41.9% and 19.7% numbers, but trails Southern Copper's 28.5% net margin. Over the past three years, it has grown free cash flow by a torrid 30.6% average per year, and has been paying down debt as it goes, dropping from a high of $7.6 billion two years ago to just over $6 billion at the end of last quarter.
Micron Technology, meanwhile, has been converting memory into money. It's gone from a net debt position of $2 billion at the depths of the market last year to a mere $56 million at the end of its just-reported fiscal third quarter, more than doubling its cash on hand during the process. That's quite an improvement during a recession, but its balance sheet isn't quite as strong as competitor SanDisk (Nasdaq: SNDK), which sits with a net cash position of nearly $1 billion. However, SanDisk is currently trading at 11.3 times free cash flow, so Micron appears to be the better bargain at the moment.
IBM was recently called the most remarkably mispriced name in the market. That could very well be true, given that it's trading for less than 10 times free cash flow. It's not the only tech company trading cheaply now, either. Dell (Nasdaq: DELL) is at 8.25 times free cash flow and Intel (Nasdaq: INTC) isn't too far behind at 10.3 times. But IBM isn't as much of a hardware company as those two are, moving more into the consulting side of things and selling software and services. That's a higher-margin business, generally, and so far, IBM has done a good job of managing the transition.
Do any of these deserve a spot in your portfolio? Only you can answer that question after checking into them further. But based on the quick looks above and their relatively cheap prices right now, they do seem compelling.
