3 Mid-Caps with Huge Cash Flow

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In my opinion, there is nothing like a company with huge free cash flow. While analysts and many investors focus on earnings per share, free cash flow tends to be a better measure of what a company can return to shareholders. In most cases, companies use free cash flow for both share buybacks and dividends. Since both of these actions deliver value to shareholders, some investors start with free cash flow first when they do their research. That being said, there are certain industries that are more well known for their cash generating capabilities. One business in particular that tends to produce significant free cash flow is the semiconductor industry. In addition, companies in this industry tend to see significant growth as they ramp up production to meet the seemingly ever increasing demand for chips. Looking for good investment ideas, I use the Fool.com CAPS Screener to try to whittle down the list of choices. In a recent screen, I asked for semiconductor companies that showed at least 10% revenue growth and 20% EPS growth over the last three years. Three different companies met my criteria: Skyworks Solutions (NASDAQ: SWKS), Cirrus Logic (NASDAQ: CRUS), and Maxim Integrated Products (NASDAQ: MXIM).

Skyworks Solutions:

Skyworks is in the semiconductor business and specifically produces amplifiers and other solutions for the cell phone industry. As you can imagine with the growth in this industry, Skyworks has done pretty well. What is strange is that the company's stock looks cheap relative to its future growth rate. At current prices the stock sells for less than 12 times earnings yet is expected to grow by almost 16% in the next five years. If history is any guide, the company might even turn in better results since they have beaten estimates each of the last four quarters. Though the company does not pay a dividend, they do produce significant free cash flow. Over the last year, the company has produced about $50 million of free cash flow on average per quarter. This is pretty amazing considering this $50 million is the equivalent of just over 1% of the company's market cap. Think about that for a minute, if the company continues this cash flow generation, they can effectively add 1% to their market cap per quarter just from free cash flow generation. In addition, the company is already sitting on an impressive pile of over $300 million in cash and investments. This existing cash balance represents 7.33% of the company's total market cap, potentially indicating the market is undervaluing the company's operations. Big time growth, good free cash flow and a nice cash balance could lead investors to sky high returns.

Cirrus Logic:

Cirrus Logic is a similar story to Skyworks, in the sense that the company is selling for less than its growth rate and also generates good cash flow. The stock sells for about 14 times projected earnings, and yet analysts are calling for over 17% growth in the next several years. While Cirrus is cheap relative to earnings, the slight difference between the company's performance compared to the other two companies we are looking at is that Cirrus has missed estimates in two of the last four quarters. That being said, Cirrus did manage to beat estimates on average by about 3% even with these two misses. The company is almost an exact copy of Skyworks when it comes to generating free cash flow, just at a lower percentage. The company generated about $7 million in free cash flow on average over the last year, but this represents about 0.27% of the company's market cap versus over 1% at Skyworks. In addition, the company has about $167 million in cash and no long-term debt, representing about 6.75% of market cap. While this is good, again it's slightly less than Skyworks at 7.33%. However, the company is growing at a faster pace than its competition, and its audio processors have many applications. For investors looking for fast growth, good free cash flow and a net debt free balance sheet, this stock sounds like a good value.

Maxim Integrated Products:

Maxim Integrated Products has a slower expected growth rate than the other two companies we are looking at, but Maxim holds a trump card and that is their good dividend. The company's yield of about 3.6% is one of the primary reasons the stock sells for about 15 times projected earnings. Though growth is expected at about 9% in the next few years, the company has consistently beaten earnings estimates, and by a decent margin of over 11% per quarter. In addition, Maxim is a cash flow machine that generates relatively more free cash flow than either of its two competitors. Not only has the company generated over $120 million in free cash flow on average in the last four quarters, but this represents about 1.58% of Maxim's market cap. In addition, Maxim has the highest amount of net cash and investments at just under $1 billion. This is truly impressive when you realize investors are getting 12.24% of the company's market cap just in net cash and investments. The company's participation in the integrated circuits market and huge cash flow generation could mean investors should integrate Maxim into their portfolio.

Conclusion:

Each of these companies offers a good value, but one common theme of free cash flow generation is evident. In addition, all three companies have a significant amount of net cash on the balance sheet, which means investors are actually buying their underlying business at a discount. Based on overall value, I would suggest investors start their research with Maxim Integrated Products. As the only company with a dividend, the best relative free cash flow, and the most cash on the balance sheet, investors are getting a lot of value. Use the above information as a starting point for your own research and you can keep up with each company by adding them to your own personalized Watchlist.


MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Cirrus Logic. 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.

blog comments powered by Disqus

Compare Brokers

Fool Disclosure