These Undervalued Companies are Swimming in Cash
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing in companies with big amounts of cash on their balance sheets makes a lot of sense from different points of view. To begin with, it is a nice strategy to find deeply undervalued plays. If the stock price is supported by cash to a considerable degree, there is a big chance that the stock is undervalued.
That is, of course, unless the company is burning that cash at a rapid peace. But there are some profitable companies out there with enormous amounts of cash, and this provides not only a tempting valuation, but also many other advantages.
These companies have the possibility to use all that extra liquidity to increase dividends or implement share buybacks, which is a smart way to distribute cash to shareholders and generate some attention on the fact that the stock is cheap in relationship to the cash balance that the company is holding.
Cash also provides the resources to keep functioning properly in an adverse economic scenario, and investors can feel confident that the company won't go broke or have to go through strict cost adjustments if things turn for the worse for a few quarters.
Cash can be used to implement different initiatives with the aim of speeding growth up, like all kind of investments in productive assets or even acquiring other business. In fact, cash-rich companies are often seen as acquisition targets themselves, since other corporations may be attracted by the low net cost implied by purchasing a business that comes with a lot of cash attached.
Cases in which a considerable proportion of the share price is backed by cash are more usual among small and risky companies, but Apple (NASDAQ: AAPL) is one remarkable exception. Based on the recently reported quarter, the biggest company in the world has more than a 20% of its share price in cash and short-term investments.
To put it in perspective, Apple now has $117.2 billion in cash and short-term investment, which would be more than enough to purchase Amazon (NASDAQ: AMZN), which currently has a market capitalization of $97.8 billion. That would be an easy way to end the competitive threat of Kindle products on the iPad and leverage Amazon's dominance in eBooks as well as the online retailer's growing video streaming business. I don't really think Apple would ever consider a deal of such size, but it helps to consider the possibilities when looking at the company's valuation and its cash holdings.
The timing for a dividend and a share buyback could hardly be better for Apple, now that earnings have disappointed and investors are concerned about slowing growth, the Cupertino giant finds itself in an opportune moment to put its cash to work and buy a nice chunk of its own stock at conveniently low prices.
True Religion (NASDAQ: TRLG), the apparel company specialized in premium denims, may be facing some headwinds due to scarce consumer optimism. High-end products are usually very sensitive to the economic environment, and the fashion business is notorious for its volatility.
But True Religion has delivered positive results since 2003, and the company even reported solid numbers during the severe recession of 2008-2009. There is an almost 25% of the share price in the company's bank account, and True Religion pays a 3% dividend yield.
Chinese internet media company Sohu (NASDAQ: SOHU) has more than 33% of its share price in net cash and liquid investments. The online gaming market in China is subject to regulatory changes, and the company is an aggressive acquirer of other business, which makes Sohu a risky alternative.
But the corporation has a strong profitability track record, and its operating margins are at a comfortable 27%. Sohu has not experienced a money-losing year since 2002, and its abundant liquid resources help at containing risks and financing growth opportunities at this dynamic Chinese internet company.
Aircastle (NYSE: AYR) makes acquisitions, leasing and selling of high-utility commercial jet aircraft to passenger and cargo airlines globally. The company has not had any losing years since it went public in 2006 and, although earnings can be volatile, its cash holdings of more than 30% of the share price are an important source of tranquility for investors. Aircastle also pays a juicy 4.9% dividend yield.
These cash-rich companies provide an interesting combination of attractive valuations, low financial risk and enough capital to fuel growth opportunities. There are good reasons to consider them as part of a fundamentally strong portfolio.
acardenal owns shares of Apple. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services recommend Amazon.com, Apple, Sohu.com, and True Religion Apparel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.