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STOCKS
Where Cash Is King
by David Landis
Corporate accounting can be enormously complex. But for most investors it boils down to one question: How profitable is a company? And the best evidence of a company's success is its ability to produce cold, hard cash. That may seem like an oversimplification, but recent history proves that reported profits can easily be manipulated through accounting tricks. So, many "show me the money" investors prefer to rely on a company's free cash flow. Companies that generate a lot of free cash (the money left over after a company pays its bills and makes necessary investments to maintain its business) are generally doing something right.
"Cash reduces downside risk because it provides options," says Jim Tringas, manager of Evergreen Special Values fund. Cash-rich companies can, for example, initiate a dividend or raise an existing one. They can buy back stock, leaving a bigger piece of the profit pie for holders of the remaining shares. Or they can make a strategic acquisition or invest in a profit-enhancing project.
Of course, a large cash stash doesn't necessarily mean a winning stock. Cash can build up simply because a company can't put it to good use. An extreme case is Microsoft, which has a $60- billion-plus bankroll. Its stock, at $28, is at the same level it was six years ago. In July, the software giant announced it would pay a $3-per-share special dividend in December, double its regular yearly dividend of 32 cents per share, and repurchase $30 billion of stock over four years. But since the announcement, the stock has barely budged.
So we searched for well-run companies that generate strong cash flow and know how to put that cash to work wisely to improve their businesses and reward their investors. These five money machines look especially appealing.
Right to print money
After nearly 65 years of spinning comic-book yarns, Marvel Enterprises rules a kingdom of 4,700 characters, including Spider-Man, the X-Men and the Incredible Hulk. Today, comic publishing is the smallest of its three business units. The big money comes from licensing the rights to its stable of superheroes to Hollywood studios, toymakers and others.
Because Marvel owns all the characters, licensing revenue is almost pure profit. Movie studios shoulder the film-production costs, and Marvel gets a percentage of the box-office and DVD sales. Similarly, Marvel leaves the toy manufacturing to others and collects the royalties. With headquarters in New York City, the company has only about 200 employees but will bring in an estimated $468 million in revenues this year, thanks in large part to Spider-Man 2. Released by Sony Pictures in June, the movie has surpassed $700 million in worldwide ticket sales and has generated an estimated $160 million in toy-sale revenues this year for Marvel.
Even so, Marvel shares have sunk almost 40% since March, to $14, on fears that the company can't top Spider-Man 2 next year. But skeptics may be overlooking Marvel's growing clout in Hollywood -- its past nine films averaged $175 million in U.S. ticket sales. "We are in demand," says David Maisel, president of Marvel Studios. "It's a question of how many projects we want to do."
As Marvel's slate of film releases grows, box-office and toy revenues will become more predictable. Movies featuring the Fantastic Four and Elektra are due in 2005. Other movies featuring Iron Man, X-Men, Namor and Luke Cage, to name a few, are in the works. The company has yet to cut movie deals for some of its best-known characters, including Captain America.
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