Think Ex-Cash: Tech Stocks Cheaper Than Cheap
Carl Icahn’s crusade to get Apple (APPL) to return more of its groaning pile of cash to shareholders is grabbing headlines, but it’s not as if Apple is the only company awash in money. According to FactSet, cash and marketable securities among S&P 500 companies (excluding financials) grew 13.5% year over year through the end of the second quarter to $1.27 trillion.
All that cash sloshing around in corporate coffers has set off a constant stream of calls for companies to boost dividends or share repurchases. What gets less attention is how standard company valuation fails to adequately account for the value of all that cash on the balance sheet. And that can be a valuable bit of financial research. If a company has an outsize chunk of cash it makes some sense to incorporate that “asset” into an assessment of what you’re really paying to own the stock.
For example, Qualcomm’s (QCOM) forward PE ratio is near 17. But as Oakmark fund lead manager Bill Nygren recently explained in a shareholder note, one of the reasons the fund just bought a chunk of Qualcomm is that after adjusting for its sizable cash on hands, he estimates Qualcomm’s PE ratio excluding cash is around 11x forward earnings. Qualcomm is currently a favorite among some star fund managers.
At YCharts you can find the PE ratio less cash metric in the Price and Valuations tab. To be sure, not all stocks are cash rich enough to make a sizable dent in their valuation. Netflix (NFLX) merely sees its regular trailing PE ratio of more than 275x fall to near 260x.
But delving into the PE ex-cash metric turns up some interesting stocks that look ever more compelling. As shown in two charts, the straight trailing PE ratio for Medtronic (MDT), Boeing (BA) and Goodyear Tire & Rubber (GT) is markedly higher than each company’s trailing price earnings ratio less cash.
REGULAR PE RATIO:
CASH ADJUSTED PE RATIO:
Over in the already cheap energy sector, Chevron’s (CVX) cash adjusted PE ratio is below 9. Say what you want about the capital spending drag on current profits, but less than 9x for a company that has expanded its profit margin above its pre-crisis high and has seen its EBITDA per share fully recover to pre-crisis levels seems worth considering.
Especially given a nice 3%+ dividend yield.
As you’d expect, it’s within the tech sector that backing out cash really becomes an eye opener. FactSet says the tech sector accounts for more than one third of the S&P 500’s cash balance. Apple’s cash balance grew 54% year over year, Microsoft (MSFT) saw its cash grow 22% and Google (GOOG) which doesn’t burden itself with paying out a dividend reported a 26% rise in its cash year over year through the second quarter.
You might be less concerned about Microsoft’s consumer-market struggles when you realize you get the strong business side of the Microsoft juggernaut for a sub-10 PE ratio once you back out Microsoft’s massive cash holdings.
Cisco (CSCO) has an even bigger valuation shift, dropping from a 12 PE ratio to a cash adjusted 7x. Oracle (ORCL) and Intel (INTC) drop from so-so valuations to the realm of cheap with cash-adjusted PE ratios below 11.
And yes, Icahn’s target du jour, Apple, also sees its PE ratio drop to around 12 when its cash and short-term investment total is accounted for. (Apple actually keeps most of its cash in securities with maturities longer than one year, so they’re classified as long-term investments. But they’re cash, really. And so, if our metric factored those in, the Apple ex-cash PE ratio would fall further still.)
There’s less clarity around Google’s (GOOG) intentions for its near $60 billion in cash given it does not pay a dividend and isn’t much into repurchases. Nevertheless, it begins to look like a not-very-expensive growth stock once you back out the cash:
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at email@example.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.
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