(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA. FCF data sourced from Yahoo! Finance.)
Although European and American debt issues are fundamentally different in cause and severity, could United States budget reform, or lack thereof, bring the country to the same crossroads as the European Union?
Michael Sivy of Time.com acknowledges that Europe’s troubles are the result of past debt, “some of which is now compounding at such high interest rates that for all practical purposes it can never be paid back. Call it a problem of arithmetic. The U.S., by contrast, is still years away from a debt crisis of the same magnitude. But it is having great difficulty getting its current budget under control. America’s problem, therefore, is not mathematical but political.”
For the US, so far so good…
To be sure, the US national debt is significant, but in relation to economic output it is a far cry from disastrous levels. US debt is nearly 100% of GDP while, for example, Italy is at 120% of GDP, but roughly one third of US debt is owed to itself (from one sector of the government to another), so it “doesn’t really count.”
Furthermore, Italy’s interest rate climbed above 7%, to the level of junk bonds, which increases Italy’s chance of default. Because investors are more confident in America’s ability to repay debts the US enjoys a relatively stable borrowing rate below 3%.
What’s the budget problem?
So, what can America do wrong from here that could bring it to the same circumstances and fate as Europe? According to Sivy, our budget is out of control.
One of the biggest budget issues to tackle, the biggest cause of long-term deficits, is the growth of entitlements, such as Social Security, which “is the easiest to stabilize.”
“The real intractable problem continues to be healthcare, including Medicare, Medicaid, Veterans Benefits and such. With rising medical costs and an aging population, it is hard to see what the solution would be, especially since recent health-care legislation has not slowed rising costs, and the prospect of reopening the health-care debate is hardly encouraging. Although we still have plenty of time to fix things, the political challenges look daunting indeed.”
He adds that given the aging Baby Boomers and record life expectancy the US has about 10 to 12 years to figure out this problem before its debts reach Italian levels (under what the Congressional Budget Office calls the Alternative Fiscal Scenario.)
Are you worried?
High debt levels can harm the U.S. economy, and it can also do damage to your portfolio. Which is why we wanted to create a list of debt-free companies that you can use to start your own analysis.
To create this list, we started with the 200 largest debt-free companies. We collected data on levered free cash flows, and identified the names that are undervalued relative to their enterprise value.
These companies have no debt, and they appear to be undervalued relative to their cash flows–should any of these names be on your radar?
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List sorted by market cap.
1. Activision Blizzard, Inc. (ATVI): Activision Blizzard, Inc. publishes online, personal computer (PC), console, handheld, and mobile games of interactive entertainment worldwide. Levered free cash flow at $1.35B vs. enterprise value at $11.94B (implies a LFCF/EV ratio at 11.31%).
2. Garmin Ltd. (GRMN): Operates as a holding company and through its subsidiaries, designs, develops, manufactures, and markets global positioning system (GPS) enabled products and other navigation, communication, and information products worldwide. Levered free cash flow at $771.14M vs. enterprise value at $5.36B (implies a LFCF/EV ratio at 14.39%).
3. Synopsys Inc. (SNPS): Provides technology solutions used to develop electronics and electronic systems worldwide. Levered free cash flow at $294.70M vs. enterprise value at $2.85B (implies a LFCF/EV ratio at 10.34%).
4. LSI Corporation (LSI): Designs, develops, and markets storage and networking semiconductors and storage systems worldwide. Levered free cash flow at $263.28M vs. enterprise value at $2.41B (implies a LFCF/EV ratio at 10.92%).
5. Dolby Laboratories, Inc. (DLB): Develops and delivers products and technologies for the entertainment industry worldwide. Levered free cash flow at $229.39M vs. enterprise value at $2.22B (implies a LFCF/EV ratio at 10.33%).
6. MKS Instruments Inc. (MKSI): Provides instruments, subsystems, and process control solutions that measure, control, power, monitor, and analyze parameters of manufacturing processes worldwide. Levered free cash flow at $146.20M vs. enterprise value at $845.28M (implies a LFCF/EV ratio at 17.3%).
7. Progress Software Corp. (PRGS): Operates as an enterprise software company worldwide. Levered free cash flow at $104.50M vs. enterprise value at $966.33M (implies a LFCF/EV ratio at 10.81%).
8. Spirit Airlines, Inc. (SAVE): Provides passenger airline service primarily to leisure travelers and travelers visiting friends and relatives. Levered free cash flow at $110.39M vs. enterprise value at $769.62M (implies a LFCF/EV ratio at 14.34%).
9. Bridgepoint Education, Inc. (BPI): Provides postsecondary education services. Levered free cash flow at $171.89M vs. enterprise value at $926.55M (implies a LFCF/EV ratio at 18.55%).
10. Veeco Instruments Inc. (VECO): Designs, manufactures, and markets equipment to make high brightness light emitting diodes (HB LEDs), solar panels, hard-disk drives, and other devices. Levered free cash flow at $121.14M vs. enterprise value at $622.89M (implies a LFCF/EV ratio at 19.45%)