Cash, they say, is king.
If that's true -- and after the financial crisis we can all agree
that it is -- then these 10 companies must be the masters of the
Each of these blue-chip companies has more than $10 billion in the
cash and near-cash line on its balance sheet. Together, their
collective cash hoard is a staggering $214.6 billion.
To put that number in perspective, $215 billion would buy each and
every resident of Atlanta a $325,000 house AND a new Cadillac
Not only is the cash line on the balance sheet strong, the bottom
line of the income statement is also robust. What's more, the
likelihood of these companies continuing to post massive profits in
the future is very high. Consider: In the 90 days that made
up the third quarter this year, these 10 companies earned a profit
of $22.3 billion. In other words, even in a down economy
mired in recession, these astonishing businesses collectively made
more than $100 million in profit every hour of every day, seven
days a week.
The question, of course, is whether these cash-rich companies are
good investments. Today, we'll look at the top two companies, and
follow up with the seven remaining companies on Thursday and
General Electric Co. (
, $61.4 billion
For experienced investors, General Electric is the House that Jack
Built. Jack Welch, the conglomerate's CEO from 1981 to 2001, took a
stodgy industrial manufacturer and turned it into one of the
leaders in power generation, health care and financial services.
Welch wanted GE to be No. 1 or No. 2 in every business in which it
participated, and managers either met that goal or they went to
work somewhere else. Now, the company is lead by Welch's
hand-picked successor, Jeffrey Immelt, and it occupies much the
same vaunted position. The case can be made, and made compellingly,
that GE is a proxy for the overall U.S. economy.
As any student of Machiavelli will tell you, a company's greatest
strength is also its greatest weakness. And when the financial
panic hit, GE was one of the companies that bore the brunt of the
blow. In early March of this year, as the market circled the bowl
and the Dow plunged to a gut-checking 6,500, things looked very bad
for GE, which derived a significant source of its revenue by making
loans that many of its customers suddenly looked unable to repay.
The falloff was dramatic. In December 2008, GE shares were trading
at about $20. By March 4th, they'd fallen to a low of $5.73, a loss
of more than -70%.
That was then.
When -- and to some degree before -- the financial crisis struck in
early fall of 2008, GE took a number of unusual steps to avert sure
and certain financial Armageddon.
First, it sold stock to raise cash. The move was extraordinarily
well timed: The company sold 547.8 million shares at $22.25 each on
Oct. 8, 2008, which brought in $12 billion.
At about the same time, GE also accepted a $3 billion loan from
Warren Buffett. GE might have thought its underwriters charged
steep fees to sell its shares, but their cut was nothing compared
with the terms Buffett exacted on his loan: Perpetual preferred
stock that pays a 10% dividend and can only be bought back after
three years -- and even then only at a 10% premium. Buffett also
received warrants to buy $3 billion worth of common stock within
the next five years.
In the meantime, the federal government stepped in to guarantee
some of GE's debt, a program the company has since started weaning
itself from as investors started showing they were once again
willing to shoulder some measure of the risk. That a company with a
long-standing AAA credit rating from Standard & Poor's needed a
guarantee underscored the severity of the financial crisis. For a
brief interlude, the composite rating on the triple-A bond shot up
above 10% and investors practically gave GE debt away, pushing its
bond prices to bargain-basement levels. S&P cut its rating; GE
cut its dividend and the Dow began to climb out of the gutter.
These moves collectively allowed GE to stay afloat. Its shares have
since rebounded to about $16, which values the company at about 12
times earnings. That's a discount from its historical average of
16.2 and well below the S&P 500's composite earnings multiple
GE, which remains profitable, is on track to earn $1.00 a share
this year, a massive -48.2% decrease from the year before. Immelt
has signaled that the company will actively seek huge government
projects and thinks they will mean $192 billion to the company
during the next three years. The consensus estimate for 2010 is a
ridiculously low $0.90 a share. I think earnings of between $1.25
and $1.50 are far more likely as the economy rebounds and Immelt
brings in government contracts. If management can indeed
deliver those kinds of results, Wall Street will be reminded of the
earning machine that GE has traditionally been, and I think its P/E
will rise to its typical 20. This, to my way of thinking, implies a
12-month price target of $30. With that in mind, and continued
growth from there back to the company's historical revenue and
earnings levels, I think the shares could be an exceptionally
strong long-term buy.
So does Warren Buffett.
His warrants allow him to buy $3 billion worth of stock within five
years. But the key to a warrant isn't the time frame, it's the
exercise price. Buffett can buy stock at $22.25 a share, which
means he clearly thinks the stock's value will be well above that
by the time the warrants expire in 2013.
Investors interested in following Buffett's lead can do so by
adding these shares to their portfolio and just letting them sit.
My prediction: Buffett will exercise that warrant and double his
money, and investors who buy now will do even better.
Berkshire Hathaway (NYSE: BRK-A)
, $26.9 billion
One of Warren Buffett's most endearing qualities is the way he
phrases things. The guy is the king of the understatement. In a
shareholder letter years ago Buffett said something to the effect
of, "We always keep plenty of cash on hand." That's like saying
Andy Roddick generally serves hard. Plenty of cash on hand? How
does $26.9 billion strike you?
Debt, as Buffett would tell you, always limits options. Cash always
creates opportunities. It can allow a company to weather a storm
and survive when its competitors can't. It can mean a business
doesn't need to seek outside financing to pursue a new opportunity.
And if you want to ensure a deal goes through, showing up with cash
is a good opening salvo.
Berkshire Hathaway, Buffett's holding company, owns insurance
companies and utilities. It also has a host of subsidiary
businesses that Buffett has bought over the years, from NetJets to
DairyQueen and Fruit of the Loom. Berkshire also has immense stakes
in about a score of public companies, including
Wells Fargo (
American Express (
. Buffett, who had been buying up railroad stocks, recently bought
No. 2 U.S. railroad
Burlington Northern Santa Fe (
Buffett's record, over time, speaks for itself. The first item in
the annual report is always the same: The change in the company's
book value, or shareholder equity, which he compares to the total
return of the S&P 500. Buffett's growth in book value since he
took over Berkshire in 1964 has been +362,319% versus a gain of
+4,276% in the S&P. He has warned that such outsize growth
simply cannot continue -- as the law of large numbers finally
caught up with him -- but he still does a pretty good job of making
money for his shareholders, and he and his partner Charlie Munger
are two of the smartest and savviest businessmen in the world.
That's all well and good, but what's really going to make the
difference this year to Berkshire Hathaway is its first
split. As part of the Burlington deal, the company is
engineering a 50-for-1 split. Owners who now have one share of B
worth $3,400 will soon have 50 shares worth $68. (50 times $68 =
$3,400.) While this doesn't erase or create any wealth in and of
itself -- as the market cap stays exactly the same -- the move will
likely create a run on Berkshire. This is a good thing: Berkshire
grows. It makes money. And it has the best management in the world.
There's no earthly reason it should trade at a -20% discount to the
S&P. One of the reasons Wall Street has a hard time unlocking
the value of this company is its arbitrarily high share price. The
split will correct that.
Why? Because everyone who invests wants a piece of Buffett in his
portfolio. For most investors, though, he's long been out of reach.
A single share of B represents a sizable chunk of change, and an
"A" share, currently selling for about $100,000, exceeds the equity
many investors have in their homes. But that's changing. After the
split, a round lot of Berkshire -- that is, 100 shares -- will
require the same capital as a similar stake in
United Technologies (
. I think Berkshire will rise to $100 a share on this demand alone.
That's not a bad reason to jump on the Berkshire bandwagon, but it
might be short-sighted. Its cash hoard, on the other hand, is a
great reason. No one has ever put cash to work more effectively
than Buffett. That's a point he has conclusively proven with the
aforementioned GE loan, a similar deal with
Goldman Sachs (
, and his recent stake in lithium-ion battery pioneer BYD Corp,
which has risen +825% since he bought the stock in fall 2008.
Do I think Berkshire is a buy? Absolutely.
On Thursday, we'll look at the next four companies on the list.
Editor, Government-Driven Investing
Disclosure: Andy Obermueller does not own shares of any security
mentioned in this article.
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