Everyone loves finding some crumpled up cash in the pocket of the jacket that's been in storage all summer. To the disorganized, this can feel like winning the lottery. But is extra cash always a good thing?
Unfortunately the answer isn't that simple. Sometimes it's good to have some extra cash lying around just in case – for instance Ford (F) was able to use it to whether the financial crisis. In fact, certain industries almost uniformly keep large capital reserves around, especially if they're in manufacturing, automobile production, utilities and raw goods – emergency funds in case of a price drop or a glitch in their supply chains.
Large amounts of cash held by a company can mean two things. It could indicate that a company is playing it safe, or trying to weather a bearish market. However it could also mean that executives are trying to enrich themselves by earmarking extra cash for glamor projects. Worst of all, investors should always keep an eye out for companies that don't seem to know what to do with their cash. This is a sure-fire sign of a leadership crunch, or a failure on the part of executives to plan for long-term growth.
To create the list below, we looked at leverage free cash flow (LFCF) – the amount of cash a company has left over after they have paid off all of their debt. LFCF is often compared with enterprise value (EV) – the sum of all of the firm's value from all of its ownership sources: market cap, debt, and preferred shares. One way to tell if a company is undervalued is if the ratio of cash flow to enterprise value is high (over 10%). We ran a screen on companies that are cash-rich at the moment, and focused on an industry where this isn't the norm – in this case healthcare. To be on the safe side, capped our screen at stocks with an LFCF/EV ratio of at least 15%.
Are these stocks hedging their bets or wasting their cash? Use the charts below to begin your own analysis.
Market cap at $878.07M, most recent closing price at $17.83.
Levered free cash flow at $99.00M vs. enterprise value at $649.06M (implies a LFCF/EV ratio at 15.25%).
2. Cumberland Pharmaceuticals, Inc. (CPIX, Earnings, Analysts, Financials):Engages in the acquisition, development, and commercialization of branded prescription products for the hospital acute care and gastroenterology markets.
Market cap at $105.04M, most recent closing price at $5.60.
Levered free cash flow at $5.36M vs. enterprise value at $34.35M (implies a LFCF/EV ratio at 15.6%).
3. Invacare Corporation (IVC, Earnings, Analysts, Financials):Designs, manufactures, and distributes medical equipment and supplies for the non-acute care environment, including the home health care, retail, and extended care markets.
Market cap at $499.27M, most recent closing price at $15.65.
Levered free cash flow at $92.59M vs. enterprise value at $581.66M (implies a LFCF/EV ratio at 15.92%).
Market cap at $369.36M, most recent closing price at $28.09.
Levered free cash flow at $64.72M vs. enterprise value at $414.47M (implies a LFCF/EV ratio at 15.62%).
Market cap at $489.43M, most recent closing price at $8.27.
Levered free cash flow at $85.55M vs. enterprise value at $413.34M (implies a LFCF/EV ratio at 20.7%).
6. Threshold Pharmaceuticals Inc. (THLD, Earnings, Analysts, Financials):Engages in the discovery and development of drugs targeting the microenvironment of solid tumors for patients living with cancer.
Market cap at $311.24M, most recent closing price at $5.51.
Levered free cash flow at $31.75M vs. enterprise value at $203.38M (implies a LFCF/EV ratio at 15.61%).
(List compiled by James Dennin. Analyst ratings sourced from Zacks Investment Research. All other data sourced from Finviz.)
Analyze These Ideas: Getting Started
- Read descriptions for all companies mentioned
- Access a performance overview for all stocks in the list
- Compare analyst ratings for the companies mentioned
- Compare analyst ratings to annual returns for stocks mentioned
- Real-Time Opinion: Scan the latest tweets about these companies (feed will open in a new window)
Dig Deeper: Access Company Snapshots, Charts, Filings
- Auxilium Pharmaceuticals Inc.(AUXL, Chart, Download SEC Filings)
- Cumberland Pharmaceuticals, Inc.(CPIX, Chart, Download SEC Filings)
- Invacare Corporation(IVC, Chart, Download SEC Filings)
- Providence Service Corp.(PRSC, Chart, Download SEC Filings)
- Spectrum Pharmaceuticals, Inc.(SPPI, Chart, Download SEC Filings)
- Threshold Pharmaceuticals Inc.(THLD, Chart, Download SEC Filings)
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