by Lawrence Meyers | April 11, 2014 8:22 am
Cash is indeed king.
When seeking out stocks to buy, there’s nothing I like to see more on a company’s financials (other than EPS growth) than more cash than long-term debt on the balance sheet.
Cash allows a company to survive the bad times. It allows the company to reinvest in its business. It is the engine that drives growth.
And most of all, it can provide shareholders with dividends.
Companies have been shoring up their balance sheets with reckless abandon since the financial crisis. In addition to wanting to remain solvent, they also see a weak economy and a lot of uncertainty.
So, let’s take a look at three cash-rich stocks to buy now, how they got there and what they might do with the money.
Apple (AAPL) is, of course, the king of the cash kings. Apple’s $158 billion in net cash and investments is extraordinary, and that translates to $178 per share in cash, giving AAPL an effective price of $435.
And I still consider Apple stock to be undervalued, as long term growth estimates are for 21% EPS growth while the company only trades at 11 times next year’s earnings.
Everyone likes to speculate what Apple will do with its cash, though we at least know that AAPL has been ramping up the buybacks.
I don’t have any particularly special insight, but considering how rarely Apple buys out other companies — and how small those acquisitions are compared to the likes of Google (GOOG) and Facebook (FB) buyouts — I expect what cash Apple does spend will at least go back to shareholders.
I personally think it would be interesting (and very doable) to double the dividend to $24 per share of Apple stock annually. That comes out to about $22.6 billion in cash payouts every year, which is no problem considering AAPL generates $40 billion in free cash flow.
Apple stock with a 4.6% yield? At that point, AAPL would land on anyone’s list of stocks to buy.
Priceline.com (PCLN) has been under pressure as of late, nearly $200 off its high of $1,378 — that’s a 15% correction in about a month.
That’s fine with me, though, because PCLN has about $6.75 billion in net cash and investments on its balance sheet, or about $129 per share. Backing that out of the current stock price, we’re looking at an effective price on PCLN stock of $1,048 per share. That’s more than 20 times expected current-year earnings — profits that are expected to grow 25% this year and 23% next year.
Nominal prices don’t actually matter, but it’s still funny to think of a four-digit stock being undervalued.
For now, I wouldn’t expect Priceline to do anything more with its cash hoard than grow it. That’s because while PCLN has grown its capex in the past few years, 2013’s total still was under $90 million — not surprising, considering Priceline is basically just a website — and free cash flow just keeps growing.
There are only 50 million shares of PCLN stock outstanding, so I think Priceline will either use that cash to eventually initiate a dividend, or to make an acquisition of a major competitor.
Expedia (EXPE), ironically, might be that competitor.
EXPE, at nearly $9 billion in market cap, is too expensive for Priceline right now, but an eventual tethering might become a necessity of survival, what with Google encroaching upon their space.
Expedia has about $1.6 billion in cash and investments, which comes out to about $16 per share — not as impressive as the other two cash behemoths, but still nothing to sneeze at. Meanwhile, it trades at 15 times next year’s earnings, while those earnings are expected to grow by 16%.
One thing to note is that Expedia has a different model, and is spending much more on capex than PCLN, thus the free cash flow situation isn’t as great. So while the cash is definitely there on the books, EXPE is likely to keep using it to fund operations, and maybe slightly increase its trace dividend of 60 cents per share (0.9% yield).
Bottom line for Expedia is that while it might be the weakest of these three stocks to buy now, it has a little extra pepper in potentially being buyout bait down the line.
As of this writing, Lawrence Meyers was long AAPL and has sold naked puts against PCLN. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs. Contact him at email@example.com and follow his tweets @ichabodscranium.
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