5 Cash-rich Tech Bargains
Timothy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When a company has either a large amount of net debt or net cash on the balance sheet the P/E ratio, a very common metric used to gauge value, becomes skewed. This is because the P/E ratio does not adjust the price for the net debt or the net cash. This leads to companies which have a lot of cash appearing to be more expensive than they really are.
Of all the sectors, tech stocks have a tendency to build up huge cash reserves. Here are five tech companies which have enough cash to seriously skew common metrics.
Apple (NASDAQ: AAPL) - Most people know that Apple has a huge amount of cash on the books. After a march to $700 per share last year the stock has since plummeted back to about $500 per share. Even without considering the cash, the stock seems cheap. Apples trades at a P/E ratio of 11.36 and a P/FCF ratio of 11.42. After adjusting for the $128 per share of cash on the balance sheet the new P/E ratio is 8.46 and the new P/FCF ratio is 8.50. Cash represents a full 25% of Apple's market capitalization. People seem to be awfully pessimistic about Apple, a stark change from a year ago when people were predicting the stock would hit $1000.
Microsoft (NASDAQ: MSFT) - People never seem to stop hating Microsoft. Every time a new version of Windows comes out someone predicts that it will be a complete failure. Microsoft trades at a P/E ratio of 14.7 and a P/FCF ratio of 7.92. The stock trades at $27.25 with $7.35 per share in cash, or 27% of the market cap. This cash lowers the P/E ratio down to 10.76 and the P/FCF ratio to an almost ridiculous 5.78. I wrote about Microsoft previously, and I think it's a bargain that shouldn't be ignored.
Cisco (NASDAQ: CSCO) - The networking giant recently received some analyst upgrades after cost-cutting efforts and an increased dividend have boosted confidence in the company. Cisco traded for around $16 per share at one point last year, but has since recovered to $21.01. The current P/E ratio is 14.07 and the current P/FCF ratio is 10.92. The company doesn't look all that cheap until we subtract out the cash. Cisco has $5.48 per share in net cash on the books, representing 26% of the market cap. Here's a fun fact: when the company was trading at $16 per share net cash represented a full 34% of the market cap at the time. Adjusting for cash the P/E ratio becomes 9.99 and the P/FCF ratio becomes 8.07. Even after the stock price rose by 25% the stock is still extremely cheap.
Nvidia (NASDAQ: NVDA) - Nvidia is a graphics chip designer and the company behind the Tegra line of mobile processors used in many smart phones and tablets. The stock has had a rough year, down from a high of around $16 per share to the current price of $12.16 per share. The stock trades at 15.06 times earnings and 12.65 times FCF. Nvidia has $5.43 in cash per share on the balance sheet, a whopping 44.5% of the current market capitalization. Talk about a mountain of cash! After subtracting out this cash the P/E ratio drops to 8.36 and the P/FCF becomes 7.02. That's quite a change.
Dell (NASDAQ: DELL) - Dell has been struggling lately as the PC market has been in decline. Recent talk of a leveraged buyout has pushed the share price up to $12.85, but it's unclear how realistic such a thing is given Dell's size. Dell trades with a P/E ratio of 8.7 and a P/FCF ratio of 7.24. Dell has a net cash position of $2.92 per share, or 23.9% of the market capitalization. This cash drops the P/E ratio to 6.71 and the P/FCF ratio to a lowly 5.60. These types of numbers make for an ideal buyout candidate, but the large market cap and the issue of overseas cash may be hurdles to a deal.
The bottom line
Because traditional metrics don't take debt and cash into account some companies may be cheaper than they appear. Having a large amount of cash on the books means that the true P/E and P/FCF ratios will be much lower than the commonly reported values. This could allow you to find bargains that most people are ignoring.
TheBargainBin owns shares of Cisco. The Motley Fool recommends Apple, Cisco Systems, and NVIDIA. The Motley Fool owns shares of Apple and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!