Cash-Rich Companies Are Ready to Spend

12/23/2009 1:00 pm EST


Michael Brush

Columnist, MSN Money

Michael Brush, contributor to MSN Money, says companies have an extraordinary amount of cash on their balance sheets, and he cites two stocks that are likely to profit.

Faced last year with the doomsday scenario of the next Great Depression, companies slashed jobs and cut expenses. The depression never came, and money continued to roll in.

That's left companies overflowing with cash—at least a half-trillion dollars more than they had at the end of 2008 and probably much more.

As of November 24th, cash levels had advanced 47% over the past year at companies listed on the three major US exchanges, according to Howard Silverblatt, the senior index analyst at Standard & Poor's. Cash at the 3,729 nonfinancial companies on those exchanges rose to $1.6 trillion from $1.1 trillion. A lot of cash has built up at private companies as well.
Inside companies, the excess of cash flow over capital spending rose to 1.17x as of Sept. 30, up from 0.88v just a year earlier. That's the highest this ratio has been during the past 50 years, says James Paulsen, the chief investment strategist at Wells Capital Management.

“It's a situation unlike any that I have ever seen," says Jim Tierney, a portfolio manager at W.P. Stewart & Co.

[Paulsen] thinks managers will open their checkbooks because they feel more confident now that profitability, stock prices, the credit markets and, to some degree, sales growth have improved.

[So,] brace yourself for a corporate spending spree that will fund acquisitions, upgrades of plants and equipment, share buybacks, and more. Think of it as a huge economic stimulus package brought to you by the private sector.

Tierney recommends looking at cash-rich companies that have decent or rising return on invested capital. "We trust that they are going to reinvest that money wisely, because of their record," [he says.]

Google (Nasdaq: GOOG) is one example. [It] has accumulated an impressive $6.2 billion in cash this year. The amount of cash held by the search engine giant rose to $22 billion by September 30th from $15.8 billion on January 1st. Google has no debt.

It's already been using its cash hoard to buy companies to build out its expertise, most recently AdMob, a provider of mobile display ad technology. Tierney expects more acquisitions like that, especially in mobile search advertising, which is a big growth area. The flexibility Google has because of all that cash means it should continue to outperform. (It traded just below $600 Tuesday—Editor.)

Another promising stock is Amphenol (NYSE: APH), which makes connectors used in mobile devices, communications equipment, and cars, all things that companies will buy more of as they upgrade their capital bases. APH has a history of using its cash flow to back successful acquisitions, and Tierney expects more. Citigroup analyst Jim Suva predicts Amphenol will do a few buyouts during the next six months, one reason he has a $48-a-share price target on the stock. It recently sold for [more than $44].

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