Many companies, large and small, have been hoarding cash since the recession as a way to maintain liquidity. However, with the economy improving, many companies are seeing less need to carry high amounts of cash. For ideas on which stocks are more likely to be offering a new dividend in the near future, we ran a screen.
We began by screening the tech sector for stocks with high amounts of cash holdings, with over $1 billion in most recent quarter cash holdings. When companies have excess cash, they either use it to reinvest in the company or they pay it back to shareholders in the form of dividends or share buybacks.
We then screened for those that appear undervalued by two measures, levered free cash flow/enterprise value and relative to EPS trends. An undervalued stock supports the idea of a share buyback, which becomes a more attractive payout option if the company believes their shares are undervalued.
Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. The higher the ratio, the more undervalued the company appears.
As for EPS trends, if you assume that P/E is equal to a constant k, increases in EPS should be matched by proportionate increases in price. When they don't match up, a mispricing may have occurred. That is, these stocks have been seeing stronger increases in analyst estimated EPS than increases in price over the last month.
Business section: Investing ideas
Below are the results of this screen. These high-cash tech stocks appear undervalued by two measures.
Do you think these companies are likely to offer a new shareholder payout soon?
Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. Dell (NAS: DELL) : Provides integrated technology solutions in the information technology (IT) industry worldwide. Market cap at $30.61B.MRQ cash and equivalents at $14.8B. Levered free cash flow at $3.83B vs. enterprise value at $25.07B (implies a LFCF/EV ratio at 15.28%). The EPS estimate for the company's current year increased from 2.03 to 2.13 over the last 30 days, an increase of 4.93%. This increase came during a time when the stock price changed by -4.17% (from 17.98 to 17.23 over the last 30 days)
2. SAIC (NYS: SAI) : Offers scientific, engineering, systems integration, and technical services to various branches of the U.S. military and U.S. government. Market cap at $4.54B.MRQ cash and equivalents at $1.5B. Levered free cash flow at $818.75M vs. enterprise value at $4.69B (implies a LFCF/EV ratio at 17.46%). The EPS estimate for the company's current year increased from 0.77 to 0.83 over the last 30 days, an increase of 7.79%. This increase came during a time when the stock price changed by 0.71% (from 12.66 to 12.75 over the last 30 days)
3. Western Digital (NYS: WDC) : Engages in the design, development, manufacture, and sale of hard drives worldwide. Market cap at $8.97B.MRQ cash and equivalents at $3.9B. Levered free cash flow at $585.50M vs. enterprise value at $5.62B (implies a LFCF/EV ratio at 10.42%). The EPS estimate for the company's current year increased from 5.75 to 6.3 over the last 30 days, an increase of 9.57%. This increase came during a time when the stock price changed by 5.19% (from 38.17 to 40.15 over the last 30 days).
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Alexander Crawford does not own any of the shares mentioned above. Cash data sourced from Screener.co, EPS and LFCF/EV data sourced from Yahoo! Finance.
At the time thisarticle was published The Motley Fool owns shares of Western Digital. Motley Fool newsletter services have recommended writing covered calls on Dell. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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