When seeking out new investment ideas, I like to run stock
screens to find companies that are inexpensive and relatively
"safe." Of course, one of the safest kinds of companies is one that
is profitable, yet also has lots of cash on the books. In fact,
some companies are so cash-rich that even afteraccounting for any
borrowings, their cash can equate to 20%, 30% or even 40% of the
If you think about it, that also means these companies are
fairly loathed by investors. It's not just that they have so much
cash, it also means their market value has slumped so low that the
company isn't really worth much more than that cash.
All of the companies on the list above have real problems.
Cisco Systems (Nasdaq:
, for example, has seen itsshares fall back to levels seen in 1998,
as sales growth has slowed. And all of that cash can't always buy
has made a half-dozen key acquisitions in the past two years, yet
analysts still think sales will only grow 4% to 6% in each of the
next two years.
Perhaps the poster child of the "cash cowboys" is
IAC Interactive (Nasdaq:
, which routinely carries more than $1 billion its books, yet has
rarely traded at a premium like other high-flying Internet stocks.
IAC started to build or buy an impressive roster of
highly-trafficked websites such as Match.com and Evite.com. But the
company's founder, Barry Diller, appears to be stuck in the mud
recently, throttling back once-promising properties like Ask.com,
or cutting losses in properties such as
The Daily Beast
by merging with traditional media companies (
in this case). If Diller ever found his footing again, that massive
cash balance could put IAC right back into the game.
Yet one cash-rich tech company may be able to turn a
bulletproofbalance sheet back into a strategic weapon. I'm speaking
Electronic Arts (Nasdaq:
, the video game developer that is undergoing a painful transition
but should emerge far healthier when the transition is complete.
Electronic Arts is the largest developer of video games in the
world, with more than $4 billion of sales in fiscal (March) 2010.
Sales likely fell 10% in fiscal 2011 for a fairly obvious reason.
Just as was the case with compact discs in recent years, consumers
have started to lose their interest in buying packaged video games.
It took Electronic Arts far too long to realize that this was a
permanent cultural change and management appeared slow-footed in
its response. Yet, in recent quarters the company has gotten wise,
pouring a lot more resources into games that can be downloaded
digitally. The move is paying off: Electronic Arts is now the
second-largest producer of video games played on Facebook and other
social media sites. If this were a new young company seen as a
social media play, then Electronic Arts would have the makings of a
initial public offering (IPO)
. Some social media companies now look set to
when they come public.
Well, it's too late for Electronic Arts to catch theIPO fever, but
it's not too late for the company to boost its reputation on Wall
Street. And that's what I see happening. The transition away from
packaged video games toward digital downloads should help boost the
company's margins. Simply put, it's a lot cheaper to skip the whole
printing, shipping and stocking process that typifies traditional
Electronic Arts likely boosted download sales 30% in fiscal (March)
2011 to around $750 million. Every dollar of those sales carries
much higher gross margins, which explains why third-quarter gross
margins rose from 51% in fiscal 2010 to 58% in fiscal 2011. It also
explains why analysts think profits will start rising much faster
than sales -- they think sales will grow just 5% in fiscal (March)
earnings per share (
should rise nearly 30% to $0.86. That trend of modest sales gains
but fast-rising profits should continue in subsequent years as the
migration to digitally-downloaded games continues.
A word of caution: Electronic Arts has invested heavily in a new
edition of the storied Star Wars franchise, known as "The Old
Republic." The massively multi-player online game is expected to do
quite well, but repeated development delays have pushed its release
out several quarters. That means Electronic Arts' results this
summer may be a bit tepid before picking up again in the fall.
However, investors may already be well-prepared for the anticipated
Action to Take -->
For a number of years, Electronic Arts' shareholders had been
clamoring for a stock buyback. They finally got their wish. The
company announced a $600 million share buyback program in February.
With all that cash on the books, the buybacks may keep coming even
after the current plan is finished. This is a clear-cut example
when lots of cash (as a percent of market value) is a reason for
optimism. If you're looking for a cash-rich rebound candidate to
add to your portfolio, Electronic Arts looks like a good bet.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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