Balance sheet powerhouses: the US companies an investor should watch
Published 10/03/2011 | 05:00
BILL Gates, Warren Buffett, the multimillionaire on the hill in your hometown: They are all figures of admiration.
Accumulating great wealth often speaks to a person's persistence and career management skill. Yet when a company achieves the same feat, it often goes unnoticed. I like to spotlight such companies from time to time by compiling a list of US companies that are balance sheet powerhouses.
To make the list, a company must have:
- Stock-market value of $1bn or more;
- Cash or near-cash of $300m or more;
- Long-term debt of $200m or less;
- Total debt no more than 10pc of stockholders' equity;
- A current ratio (current assets divided by current liabilities) of 2.0 or more;
- Fully diluted earnings of at least 10 cents a share in the latest fiscal year.
This year, 28 companies made my Balance Sheet Powerhouse list. That's pretty good considering the economy is recovering from a dreadful recession. In 2006, 42 companies passed these tests while 38 were on the list in 2005.
I compiled this list for six years from 2001 through 2006, and then abandoned it for a while. I am bringing it back because I believe investors pay too much attention to short-term fluctuations in earnings, and not enough attention to longer- term qualities such as balance-sheet strength.
To make this list is not equivalent to a stock recommendation.
That's because companies that make it are often so outstanding their excellence is already recognised with a high price. To make money in the stock market, you need to find either a great company at a good price, or a good company at a great price.
A few companies have graced the Balance Sheet Powerhouse list several times.
Forest Laboratories is the only company that has made it all seven years. The drug company has been an uninspired investment for the past decade. It trades at about $32, little changed from its level 10 years ago.
I believe New York-based Forest Labs will be an excellent investment. The drugmaker is debt free and its shares trade at seven times earnings. The company has enhanced its pipeline by agreeing to acquire Clinical Data of Newton, Massachusetts for $1.2bn.
That will give Forest Labs the rights to Clinical Data's new antidepressant Viibryd, which was approved by the US Food and Drug Administration in January. Viibryd could be a possible successor to Lexapro, which loses patent protection in 2012.
Lexapro has been Forest's best-selling drug, accounting for over half of sales. Forest was formerly tied with Microsoft at six appearances on this list. Microsoft missed the debt-to-equity ratio cut-off this year.
San Diego-based Qualcomm, the communications-technology company, is back for a sixth appearance. One of its latest ventures involves interactive graphics, a project it dubs augmented reality. One example is a virtual-reality basketball game in which players can move their mobile phones around to shoot from various angles.
EBay missed the cut this time, tripping on the same hurdle as Microsoft. (Ebay's debt is 12pc of equity.) Both Microsoft and EBay still have strong balance sheets but in my opinion, just not quite excellent enough to meet the powerhouse criteria. Google, the largest company on this year's list in terms of market value, has made the list each year it was eligible.
AVX looks attractive as a purchase. Based in South Carolina, AVX makes components that store and regulate electrical energy.
AVX shares trade at 12 times earnings and 1.4 times book value (corporate net worth per share). Those are attractive valuations, especially for a company that stayed profitable during the recent recession. Analysts expect it to post a 67pc earnings increase this fiscal year. I also like Dallas-based Texas Instruments, which is making the roster for the first time this year.
Here is the list of 28 stocks that are balance sheet powerhouses; Seven times honoured: Forest Laboratories; Six times: Qualcomm; Four times: AVX, Gentex Corp; Three times: Bed Bath & Beyond, Google; Twice: American Eagle Outfitters, Dolby Laboratories.
New to the list: Autodesk, Celgene, Cognizant Technology Solutions, Cree, Edwards Lifesciences, Expeditors International of Washington, Genzyme, Hansen Natural, J. Crew, Juniper Networks, Mastercard, Micros Systems, Novell, Pharmaceutical Product Development, Polycom, Quanta Services, ResMed, Simpson Manufacturing, Teradata and Texas Instruments.