Do These Five Companies Get A's ?

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Recently The Cato Institute released a report and graded all 50 governors for fiscal performance. You can see the entire report here.

I'd thought I'd grade five companies that are headquartered in each of the states whose governors got an "F". Did they get A's instead?

The key criteria for the governors were taxes, spending and budget deficits. Those who raised taxes and increased spending and had high budget deficits got low grades.

The key criteria for the companies will be management effectiveness, amount of free cash flow, debt level and consistency of earnings growth. All of these items are important factors in assessing the strength of a company. (NASDAQ: AMZN) is the online retailing giant based in Seattle, Washington. It dramatically changed the way we order books and other items. Instead of going to a "brick and mortar" store we can instead go to our computer, iPad or smartphone to do the job. 

Based upon its strong financial performance I'd give Amazon an overall grade of "A" and state that the stock is a good opportunity going forward.

Here are the details:

1. Management (A+): CEO Jeff Bezos is arguably one of the best in any business today. He could move on to another company and make it get good grades. The company has a very well-known brand. When anyone thinks of ordering online they most likely will go to Amazon. This will continue to drive performance in the future.

2. Earnings (B+): Over the past five years earnings have grown about 25% annually on average although in the past 12 months have declined by 64%. However, I wouldn't worry too much as growth is expected to pick up again over then next few years. Almost an "A" here.

3. Cash (A-): The company had over $2 billion of free cash flow at the end of 2011, slightly lower than previous years. A good use of that money would be to buy back shares or pay a dividend. Either of these things would contribute to increased shareholder value.

4. Debt (A+): There is no debt. The company won't be forced to use cash to pay bills and won't go out of business anytime soon. Good things for the long-term.

Hawaiian Holdings, Inc. (NASDAQ: HA) is the parent company of Hawaiian Airlines which is the 11th largest in the U.S. The headquarters is located in beautiful Honolulu. Who wouldn't want to work there?

Unfortunately it is barely passing with an overall grade of "C-". I would stay away from the stock.

1. Management (B): I haven't heard anything bad (or good) about them and the company is one of the better ones to work for according to some surveys I have seen in the past. I'll be charitable here.

2. Earnings (C): Earnings have declined by an average of over 44% a year since 2007, although it grew 12% over the last 12 months. On the way to a "B"? The company will have to perform better in this area to drive the stock price higher in the future.

3. Cash (C-): Hawaiian had negative free cash flow at the end of last year, although it has been positive in prior years. Can it get a better grade next year? Without cash the long-term prospects for the company aren't looking up.

4. Debt (F): The company owes a lot of money. Long term debt/equity ratio (TTM) is 200%. It might not be able to expand and future growth will be limited. It might take awhile to get a passing grade here.

Target Corp. (NYSE: TGT) is headquarted in Minneapolis, Minnesota, and is the second largest discount retailer in the country. It is ranked number 33 on the Fortune 500 list by revenue. Relatively big company and investors probably have high expectations for them. 

I'll assign an overall grade of "C+". Striving for that "B-".

1. Management (B-): Nothing spectacular here. I like Target stores in general. Good shopping experience. I like their logo which identifies their brand well. Most people know it.

2. Earnings (C+): Earnings growth has averaged about 6% a year which is below its competitors (and expectations). This slow growth could put a lid on future performance.

3. Cash (B-): The company has positive free cash flow although it declined somewhat from 2010 to 2011. Some money left over for future expansion or provide more shareholder value?

4. Debt (D-): Target owes a lot of money. Its long term debt/equity ratio (TTM) is about 95%. Needs to study harder in this area. The debt could hamper future growth.

General Electric Co. (NYSE: GE) is the diversified, industrial conglomerate with headquarters in Fairfield, CT but has operations almost everywhere. It has businesses in energy, defense, aerospace, healthcare, transportation and building systems, among many others. It is ranked 6th on the Fortune 500 list. 

I'll assign it an overall grade of "C-". Has done better in the past. Needs to get its mojo back.

1. Management (C): Management is fair to middling. After former CEO Jack Welch retired in 2001 the company has lacked direction. Saving grace is a well known brand name for many products.

2. Earnings (D+): The company earnings have declined 9% year-over-year on average over the past half decade, lagging its peers and the overall market. This doesn't bode well for future performance.

3. Cash (A): It has lots of free cash flow, more than $14 billion at the end of 2011. It's doing something right here. It should make better use of it.

4. Debt (F): It has tons of debt. The long term debt/equity ratio (TTM) is over 260%. Needs to significantly improve in this area. Maybe it could use some of that cash to pay off debt?

Boeing Co. (NYSE: BA) has headquarters located in Chicago, Illinois, having moved there in 2001 from Seattle. It is widely known for its commercial jetliners like the 747, 777 and the 787. However, it operates in other industries like space and defense as well. 

I'll give Boeing a "C+." Could be a "B-" with a little more effort.

1. Management (C+): Average. Can be better. It does have a widely known brand. However, it is in a very tough competitive environment.

2. Earnings (B+): Earnings have grown by 13% a year for the past 5 years, beating its competitors. On the right path although I bet it could be higher and help shareholders a bit more.

3. Cash (A-): Boeing had about $1 billion in free cash flow last year. I would have thought it would be higher. The company probably needs to improve operations to pump this up and increase shareholder value.

4. Debt (D+): A total debt/equity ratio of 188% brings down the grade. Needs to improve here. This area could drag down the long term value of the company.

So the final exam will be to determine how the stock prices have stacked up. The performances pretty much are in line with the categories above. If there were bad grades the stock price reflected that. Hawaiian Holdings surprised me a little. It must have studied harder for the final.

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AMZN data by YCharts


So it looks like most of the companies with headquarters in states whose governors got bad fiscal grades also are not shinning in the investor's classroom either. One notable exception is Amazon. Should they move to one of the "A" states?


Mathman6577 has no positions in the stocks mentioned above. The Motley Fool owns shares of and General Electric Company. Motley Fool newsletter services recommend 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.

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