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STOCKS
Where Cash Is King
(Page 3 of 3)
by David Landis

Cash-rich tester

When Ferrari needed a testing system to replicate the performance of its Formula 1 engines in a lab, it turned to a small U.S. company, MTS Systems, with a solid reputation in engineering circles. MTS specializes in complex, big-ticket testing equipment and simulators for auto and aircraft makers, bridge and road builders, and others.

Recently, though, the company has also begun to attract attention for its $147-million cash hoard, worth roughly one-third of its $428-million market value. Appropriately, MTS, based in Eden Prairie, Minn., has achieved this cash buildup by turning its engineering focus on itself. Soon after the arrival in 1998 of new CEO Sidney "Chip" Emery from Honeywell, MTS began a concerted effort to reduce the amount of money tied up in such items as inventory and unpaid invoices, which are collectively known as working capital. In 2001, it took MTS 41 cents in working capital to produce a dollar of new revenues; today, it takes 19 cents. The difference accounts for about two-thirds of the company's cash balance, says company treasurer Paul Runice.

Because of MTS's improved efficiency, profits are growing faster than sales. Earnings are forecast to hit $1.23 this year, up 30% over last year, on revenue growth of just 6%. Not so coincidentally, this new profitability focus has coincided with a steady rise in MTS's share price. The stock, as low as $5 in 2000, fetched $21 in mid October. But analyst Liam Burke of broker Ferris Baker Watts thinks shares are worth $33. Much new growth could come from the company's second line of business, the manufacture of high-end sensors for use in machine tools and hydraulic equipment. The division accounts for just 15% of revenues currently, but that could rise to 50% in five years, says Runice. Meanwhile, MTS rewarded shareholders by boosting its dividend this year by 33%, to 32 cents per share, and by buying back more than one million of its shares this year.

Service pays

Anyone who has tried to set up a home wireless network or link a flat-screen TV to a cable box and DVD player knows that electronics have a long way to go before they're as simple as toasters. That is one big reason why Best Buy is holding its own against discount competitors such as Wal-Mart and Dell.

The largest consumer-electronics retailer in the U.S. has figured out that providing a higher level of service does not necessarily mean lower profits. Best Buy's technical-support and installation business -- home to its "geek squad" -- is on track to generate $650 million this year, or 2% of projected sales. And its "customer centricity" program, which offers everything from special financing deals to home-consultation services to its most profitable customer groups, boosted sales growth by about 5% in the 32 stores in which it is being tested.

The stock of the Richfield, Minn., company has risen 28% since August, to $57, on the strength of impressive sales and Best Buy's rising share of consumer-electronics retailing (now 17%, up from 11% in 2000). Profits are expected to grow 21% in the year ending February 2005, to $2.94 per share. Expansion (the company will open 70 stores this year) will fuel much of that increase. But by keeping costs down, Best Buy is also making good on a pledge to boost operating profits to 7% of revenues by 2007, from 4.8% in 2003. As for cash, Best Buy has a cool $2 billion in the till.

Still, many analysts think the company is undervalued despite fears that rising interest rates could depress consumer spending. Standard & Poor's analyst Amy Glynn says the stock should fetch $68 based on Best Buy's historical price-earnings ratio of 23.

As sales of digital TVs (now in just 8% of homes), MP3 music players, digital cameras and laptop computers accelerate, Best Buy should continue to produce solid sales growth. Boosting its dividend in September to 44 cents a share (it was initiated last year at 40 cents) was a sign of confidence. Best Buy also plans to repurchase $500 million of its shares. Obviously, executives see the stock as a best buy.

--Research: Katy Marquardt

Rolling in Dough: Cash rich and good to their shareholders

Companies that generate a lot of free cash flow have flexibility. These five companies are putting cash to work on behalf of their shareholders in various ways.

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