Consistent Cash Creators with High Normalized Earnings Yield

Tuesday, March 24th, 2009 | Stock Research with 9 Comments

This is a follow-up to a series of posts I wrote last year on companies that are consistent cash creators. Given we are potentially at a market turning point, I decided to run my Consistent Cash Creators screen again.

Before I jump into the screen results, let me explain how I run this screen. I first start out by using a database of over 9,000 companies. I then filter out companies in the financial sector. From that list I keep only companies with average returns on invested capital greater than 10% over the past five years. I use this metric as a proxy for sustainable growth. Finally, I filter out companies that did not exhibit positive free cash flow growth per share over the past seven years because this is suppose to be a list of cash creators, not destroyers. Applying these filters resulted in a list of 946 companies on March 20, 2009.

The next step in this screen involves determining how consistent these remaining companies grew their free cash flows. I take the linear regression of free cash flows over the past seven year and determine how close free cash flows followed a linear trend using the r-squared statistic. I then only keep companies that have r-square values greater than 0.90. This reduced the remaining list of companies to 57.

The final step I take is to sort the list of stocks by a value metric. In this case, I used a normalized earnings yield. This earnings yield is equal to a company’s operating earnings before interest and taxes (EBIT) divided by its enterprise value. I used the average of this earnings yield over the past 7 years for today’s screen. The idea here is that using the average EBIT over the past 7 years will adjust for companies at the top or bottom of a particular industry cycle. Here are the top 30 companies sorted by this normalized earnings yield on March 20, 2009:

Company Ticker Norm. EY P/E P/FCF P/B ROIC R2
Robert Half International Inc. RHI 62 10.3 8.5 2.5 25.4 0.90
J. Crew Group, Inc. JCG 58 14.6 15.5 3.4 18.5 0.93
Sherwin-Williams Company SHW 48 11.2 8.9 3.8 21.5 0.93
Epicor Software Corporation EPIC 36 352 3.8 0.8 2.8 0.96
EZCORP, Inc. EZPW 36 8.8 9.4 1.3 17.9 0.94
Dover Corporation DOV 33 6.8 7.2 1.2 13.2 0.95
NetApp Inc. NTAP 30 51.2 6.5 3.2 12.8 0.96
MICROS Systems, Inc. MCRS 28 13.8 10.9 2.2 12.9 0.94
Accenture Ltd. ACN 28 10.8 9.4 9.1 82.4 0.93
Emerson Electric Co. EMR 27 8.8 13.9 2.4 18 0.91
United Technologies Corporatio UTX 26 8.3 10.3 2.4 21 0.97
ABB Ltd (ADR) ABB 26 9.9 17.8 2.8 24 0.94
China Mobile Ltd. (ADR) CHL 26 10 55.1 2.5 22.1 0.93
Johnson & Johnson JNJ 25 11.3 21.4 3.4 23.8 0.91
Cisco Systems, Inc. CSCO 25 12.7 8.5 2.5 17.6 0.96
Trimble Navigation Limited TRMB 24 13.2 11.6 1.6 10.4 0.92
Adobe Systems Incorporated ADBE 23 13.6 9.6 2.3 17.3 0.91
Parker-Hannifin Corporation PH 23 5.8 6.7 1.1 13 0.90
Rollins, Inc. ROL 23 23.4 32.4 7.0 23.5 0.91
Quest Diagnostics Incorporated DGX 20 13.9 11.4 2.4 12.5 0.92
IDEX Corporation IEX 20 13.1 10.9 1.4 8.4 0.94
Imperial Oil Limited (USA) IMO 20 9.6 14.3 4.2 42.1 0.92
General Dynamics Corporation GD 20 6.1 7.2 1.5 18 0.92
Amgen, Inc. AMGN 19 12.5 9.8 2.5 13.6 0.92
Danaher Corporation DHR 19 13.6 11.1 1.8 11.6 0.98
Laboratory Corp. of America Ho LH 19 13.7 10.2 3.7 15.7 0.91
Wabtec Corporation WAB 19 9.6 8.9 1.9 13.4 0.91
j2 Global Communications, Inc. JCOM 17 12 10.4 3.3 27.3 0.99
Somanetics Corporation SMTS 16 17.9 12.5 2.0 9.2 0.95
Baxter International Inc. BAX 14 15.7 31.2 4.9 21.2 0.90

I’m pleased with the results of this screen. The final screen includes several high quality wide moat companies that are likely trading well below their intrinsic value. However, I don’t recommend blindly investing in any of these companies. I think each one must be further examined to determine if their business has a sustainable competitive advantage. In addition, each company should be valued to confirm whether the price of these stocks provides for a significant margin of safety. If you look into any of these stocks, please let us know what you find. We can discuss the individual stocks further in the comments section below.

Disclosure: I do not own any shares of the companies listed above at the time this post was published, except for a small position in Cisco (CSCO).

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