Consistent Cash Creators, Part 3: The Value Screen

Continuing my series on Consistent Cash Creators, this week I’ve pulled all my previous work together to create an actual screen. In Part 1 of Consistent Cash Creators, I examined the most consistent cash generating companies. I received some excellent feedback. In response to a comment regarding the appropriateness of using a linear trend model, I examined whether it is better to use a linear or exponential trend for free cash flows in second part of this series. Today, I’m going to respond to the other comment I received regarding the sorting of the list by value and including several key fundamental price ratios.

I first started out by using a database of about 9,000 companies. I then filtered out companies in the financial sector. From that list I kept only companies with average returns on invested capital greater than 10% over the past five years. I used this metric as a proxy for sustainable growth. Finally, I filtered 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 974 companies.

The next step involved determining how consistent these remaining companies grew their free cash flows. I took the linear regression of free cash flows over the past seven year and determined how close free cash flows followed a linear trend using the r-squared statistic. I then only kept companies that had r-square values greater than 0.70. This reduced the remaining list of companies to 169.

This list of consistent cash creators includes many great companies. However, many of these companies are richly valued. In order to find the best values, I decided to use Joel Greenblatt’s Magic Formula earning yield (EY) metric to sort the list of consistent cash generating companies. This EY is equal to a company’s operating earnings before interest and taxes divided by its enterprise value. The following table lists the top 30 companies sorted by earnings yield:

Consistent Cash Creators

Company Ticker EY P/E P/FCF P/B ROIC
NutriSystem Inc. NTRI 40.18 4.50 5.5 3.18 72.10 0.71
TROY Group, Inc. TROY 25.17 8.70 8.9 2.12 21.40 0.75
LCA-Vision Inc. LCAV 24.39 8.00 22.5 2.62 26.40 0.81
Nam Tai Electronics, Inc. NTE 23.90 6.30 46.2 1.32 10.80 0.89
Perini Corporation PCR 23.88 10.80 4.1 2.8 21.50 0.71
Wayside Technology Group, Inc. WSTG 22.71 12.30 21 1.78 11.40 0.85
Valero Energy Corporation VLO 22.57 6.20 10.7 1.45 18.80 0.74
North American Galvanizing & C NGA 22.48 8.00 7.4 1.93 26.90 0.76
Holly Corporation HOC 21.54 7.80 10.3 4.04 39.50 0.75
ConocoPhillips COP 20.78 10.70 12.6 1.39 10.70 0.82
Palomar Medical Technologies, PMTI 20.02 13.50 12.3 1.82 9.40 0.77
AmSurg Corp. AMSG 19.99 16.80 13.4 1.78 25.00 0.78
American Eagle Outfitters AEO 19.54 9.40 21.8 2.7 27.00 0.87
Trend Micro Incorporated (ADR) TMICY 19.04 9.40 268.1 4.45 17.10 0.76
Manpower Inc. MAN 17.30 9.60 16.4 1.66 14.50 0.79
Tesoro Corporation TSO 17.07 7.40 8.1 1.34 13.30 0.77
Exxon Mobil Corporation XOM 16.54 11.80 16.6 3.85 30.90 0.88
Pacer International, Inc. PACR 16.19 10.10 7.6 1.72 15.30 0.84
Aristotle Corporation, The ARTL 16.08 10.80 9.8 3.76 44.80 0.80
Denny’s Corporation DENN 15.04 7.90 13.9 0 45.10 0.91
Occidental Petroleum Corporati OXY 14.44 12.40 19.1 2.73 20.60 0.89
Jones Lang LaSalle Incorporate JLL 14.44 9.90 9.5 2.38 24.20 0.79
Comtech Telecomm. Corp. CMTL 13.69 14.40 19.3 2.43 11.90 0.83
Information Analysis Incorpora IAIC 13.64 10.30 4.4 1.82 29.40 0.74
Tempur-Pedic International Inc TPX 13.36 9.60 16.5 26.34 26.50 0.72
Moody’s Corporation MCO 13.35 12.80 12.5 0 194.40 0.97
Endo Pharmaceuticals ENDP 13.18 13.60 8.9 2.38 14.80 0.88
Aeropostale, Inc. ARO 13.12 14.30 22.6 8.82 62.20 0.74
AstraZeneca plc (ADR) AZN 13.10 9.70 16.7 3.58 19.20 0.81
Sherwin-Williams Company SHW 13.05 11.10 12.3 4.37 25.40 0.72

The top stock on the above list, NutriSystem (NTRI), sticks out in my mind, because it is one of Geoff Gannon’s picks for the SINLetter stock contest. There are also many oil industry stocks in the results. But with oil at all time highs, I’m not sure that these stocks provide a margin of safety. Some of you might also notice several stocks on this list that are popular with fellow value investors, including: American Eagle Outfitters (AEO), Moody’s (MCO), and Sherwin-Williams (SHW).

I’m pleased with the results of this screen. 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 find this list helpful, please let me know. I could publish it here periodically if there is interest.

5 thoughts on “Consistent Cash Creators, Part 3: The Value Screen

  • March 20, 2008 at 10:41 am

    George, would it be possible to take the average operating earnings before interest and taxes for the seven years, instead of the last year performance?

  • March 20, 2008 at 10:46 am

    I guess it would be possible for me to do that. Did you want that number to determine a “normailzed” EY? Please explain your reasoning for this number a little more.

  • March 20, 2008 at 10:55 am

    Hi George, yes if you normalize it I think you will take out noise about being at the top or bottom of a particular industry cycle. Greenblatt also normalize his EBIT # in his actual research. The reason he takes last year EBIT in TLTBTM is to make it simple to the lay investor.

    Thank you

  • March 20, 2008 at 10:32 pm

    Great work George!


    Can you please link me to where you found Greenblatt’s normalized e/y research?

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