Consistent Cash Creators with High Normalized Earnings Yield
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).
Very nice screen — love the criteria you used. I currently own CHL, AMGN, and JCOM from your list. Will be doing due diligence on some of the others.
Thanks
I’m glad you like the screen, Jeff. I’m curious as to your rationale for adding CHL, AMGN, and JCOM to your portfolio. I’d also love to hear if you find any other stocks on the list that meet your investment criteria.
Nice screen. It shows many good companies that I have come across previously.
I owned PH before and I may have to revisit that one.
I appreciate that you use enterprise value rather than market cap; that gives a little (deserved) boost to the non-levered companies.
Really good article on ‘stock valuation’! Thanks!! Enterprise value is better in terms of valuation.
Here is the ‘Buy Alerts’ spreadsheet criteria I use for identifying potential stock purchase ideas. It shows the numbers for my JCOM purchase made on 2/25/09 as an example:
BUY ALERTS
COMPANY
JCOM (j2 Global Communications)
Company Type
Fast Grower
Market Cap ($Millions)
$735 Mill
Stock Price
$16.76
CATEGORY
CRITERIA
Actual
Points (0 or 1)
Analysts’ Ratings
Schwab Equity Rating = A or B & MarketGrader.com > 60
B=18 & 82.4
1
Risk
Cash Equivalents % of Mkt Cap > 10%
$140.7= 19.1%
1
Risk
Total Debt % of Mkt Cap < 30% OR Debt<Cash
0.0%
1
Value
Free Cash Flow % of Mkt Cap > 8%
$64.7=8.8%
1
Value
Price/Earnings Ratio (Current Year) < 15
10.7
1
Growth
P/E Ratio Comparison: (Next Yr < Current Yr) or <10
9.7
1
Profitability
Return-On-Equity (ROE) > 20%
29.75%
1
Momentum
Relative Strength (Current> 6 Mos. Ago)
.207 > .154
1
Company Type*
Use Criteria Shown Below
PEG = 0.9
1
Total Points
9
* Slow Grower
Dividend Rate & Sustainability
* Stalwart
P/E Ratio Comparison: (Current Year < Historical)
* Cyclical
Inventory/Sales Ratio Comparison: (TY < LY)
* Fast Grower
PEG Rate < 1.0
* Turnaround
* Asset Play
george,
just found the ‘fat pitch’ site = great learning experience. now, i must classify myself as a newbie to the world of investments; i understand the terms, etc etc but i lack a feel or maybe the maturity to put the pieces together for myself as yet.
your ccc methodology is clear and well thought out. i can understand it just fine.
now, a question: i had been learning my way around ‘seeking alpha’ and found this article on ‘cash cows’:
http://seekingalpha.com/article/98516-25-cash-cows-to-ride-out-the-storm-barron-s
their research and yours produced different results. is it as simple as barron’s found companies sitting on a pile of cash produced in the past, and your ccc-criteria is finding companies on their way to building a pile of cash into the future?
if so, would you think there is a rationale or bias to selecting items from one list or the other — given the current market? or further, might you pair these lists with a secondary criteria, perhaps industry momentum or something, and say that the pair is suggesting what might be great choices for the now.
anyway, thought i’d ask, and great job on what you did.
ron