Skip to Content
Investing Specialists

Companies That Can Lose Some Weight

These companies can do better things with their cash than hoard it.

Mentioned: , , , ,

Cash has certainly been king the past couple months as we have progressed through the credit crisis, yet cash ultimately remains an asset with low productivity. Though it's certainly a good idea for a company to maintain a healthy balance sheet, having too much cash can also weigh down returns on capital, while providing management teams temptation for wasteful spending and/or empire-building.

I've found a handful of high-profile companies--some in the Tortoise and Hare portfolios I manage in StockInvestor--that have been hoarding their cash. All of these companies have solid competitive positioning (narrow or wide economic moats) and generate significant amounts of free cash flow, even today. In other words, they have no need to keep mountains of cash for competitive or viability reasons.

What's more, all these companies have stocks that appear to us to be significantly undervalued. One of the easiest ways to create shareholder value for companies lucky enough to be in this position is to buy back shares of their own stock. In addition, if these companies are intending to use their cash to purchase other businesses, now appears to be a prime time to do so, when the chips (and business prices) are down.

Here is the list, with the most offensive hoarders at the bottom. 

 Microsoft (MSFT)
Net Cash: $20.7B
Free Cash Flow (trailing 12 months): $15.6B
Market Capitalization: $170.1B
Morningstar Fair Value Estimate: $35
Stock Price: $19.12
Microsoft was once one of the worst cash hoarders around, but then it changed its ways and started to return significant amounts of cash to shareholders. In fiscal 2005, Microsoft paid $36 billion in dividends, mostly via a special one-time dividend, and it has also been buying back tens of billions worth of stock each of the past couple years, including $13 billion worth over the past 12 months. Bravo for actions thus far, but the company can still afford to kick it up a notch and return even more cash to shareholders.

 eBay (EBAY)
Net Cash: $3.8B
Free Cash Flow (trailing 12 months): $2.5B
Market Capitalization: $18.5B
Morningstar Fair Value Estimate: $40
Stock Price: $14.45
A bit like Microsoft, eBay is a company that has been buying back its stock ($2.2 billion net the past 12 months), but it can afford to do much more. EBay did make what appears to be a sensible purchase since the latest balance sheet was posted, buying online payment firm Bill Me Later. Curiously, instead of using existing cash, eBay chose the "bill me later" option itself, drawing down credit lines to pay for the purchase.

 Autodesk (ADSK)
Net Cash: $0.9B
Free Cash Flow (trailing 12 months): $0.7B
Market Capitalization: $4.2B
Morningstar Fair Value Estimate: $44
Stock Price: $18.52
Autodesk is a software company with a very wide economic moat, and overhead general and administrative expenses that currently run a little over $200 million per year. Having a little cash cushion is good, but Autodesk could stand to slim down a bit.

 Google (GOOG)
Net Cash: $14.4B
Free Cash Flow (trailing 12 months): $4.8B
Market Capitalization: $97.6B
Morningstar Fair Value Estimate: $575
Stock Price: $310.17
Google has done a fantastic job attaining the high ground concerning Internet search and advertising, but a lot of the cash it has generated has been wasted on various "science projects" that may or may not pay off in the future. Unlike the others mentioned thus far, Google has yet to repurchase any meaningful portion of its stock, nor does it pay a dividend, even though it could easily afford to do both. 

 Apple (AAPL)
Net Cash: $24.5B
Free Cash Flow (trailing 12 months): $8.5B
Market Capitalization: $80.0B
Morningstar Fair Value Estimate: $169
Stock Price: $90.00
Apple easily wins the prize for being the worst cash hoarder. The company has never paid a dividend and has not bought back meaningful portions of stock. In fact, it is still a net seller of stock, taking in $483 million in cash the past 12 months due to employees exercising options. Apple has so much cash that it could pay about four years worth of operating expenses out of just the cash currently on the balance sheet. I'm not exactly sure what Apple plans to do with the mountain of cash that's piling up, but I'd love to see some of it returned to shareholders.

Small print: Net cash is defined as cash and investments, minus debt. Free cash flow is operating cash flow minus capital expenditures. Balance sheet dates are Sept. 27 for Apple; Sept. 30 for eBay, Google, and Microsoft; and Oct. 31 for Autodesk.

 

StockInvestor Newsletter
Your 32-page monthly guide to applying the techniques of the investing greats. Morningstar StockInvestor is devoted to helping you pick great stocks. We do that byanalyzing the proven strategies of outstanding investors and showing you how to improve your stock picking. Learn More.
 $119.00 for 12 Print Issues $109.00 for 12 PDF Issues
   

Paul Larson has a position in the following securities mentioned above: ADSK, EBAY, MSFT. Find out about Morningstar’s editorial policies.