Briefing.com item on companies with high cash and securities positions
Cash Is King
[BRIEFING.COM - Robert Walberg] Elvis may be the King of Rock & Roll and Muhammad Ali may have been the King of the Ring, but in the investment world it is cash that is king. We're not referring to the cash held by investors, though those traders smart enough to move into cash in late February are king-like in our opinion. No we're talking about the cash held by companies.
In today's more conservative investment climate, Briefing.com contends that investors will want to shy away from companies that are cash-poor. The rise in rates and the miserable performance by the tech sector/market over the past couple months has made it very difficult for companies, especially those with limited histories, to raise additional capital. Any company that will have to go to the market with a secondary offering in order to raise funds is likely to seriously underperform over the near- to intermediate-term (at least). Consequently, we advise sticking to those companies with enough cash on hand to fund operations for at least the next six to eight quarters.
Two examples of companies with ample cash and bright long-term prospects are CNet (CNET) and Cell Genesys (CEGE). Though both stocks took beatings during the recent market meltdown, we maintain that they are well-positioned for the long-term given that the emerged from the sell-off with very strong financials.
In fact, the first thought that comes to mind after breaking down Cell Genesys' numbers is "I'll buy that for a dollar." Actually, in this case it's more like two bucks, but that's about all an investor is paying for CEGE's operating business at today's price. Hard to believe but it's true. Let's do the math. CEGE has about $250 mln in cash, which divided by 33.7 mln shares outstanding comes to roughly $7.40 per share in cash. The company also holds about a 12% stake in Abgenix (ABGX 110), which is valued at $534 mln, or about $15.80 a share. Add the two together and you get $23.20 in cash and l/t marketable securities. Subtract that figure from yesterday's closing price of $25 and you are paying a mere $1.80 for the company's operating business.
So even though Cell Genesys lacks the kind of pipeline Briefing.com likes to see in a Biotech company, as none of its drugs/therapies are beyond Phase II trials, it more than makes up for that fact with its financials. CEGE can use its cash to aggressively fund new R&D. It's a long-term bet, but if you're looking to take a flyer in the volatile but exciting Biotech industry this a low-risk way of doing it.
CNet's story is similar, though less extreme. This leading new-generation media company is sitting on about $8.30 a share in cash and short-term securities. The company also holds an 11% stake in NBC Interactive (NBCI 22 1/4), which is worth about $149 mln, or $1.70 a share. Combined you get about $10 a share in cash and marketable securities. Subtract this figure out from CNET's current price of $32 3/8 and you would be paying $22 and change for CNET's operating business. In our opinion that makes CNET one of the best buys in the Internet sector, as the company has an excellent management team, relatively high brand awareness and a history of strong top-line growth. The bottom-line is also expected to show significant improvement over the next couple of years as CNET reduces its expenditures on marketing. Consensus estimates call for earnings of $0.11 in FY00 and $0.53 in FY01, with a projected long-term growth rate of 46%. On an operating basis, investors are paying about 200x estimated FY00 earnings but only 42x projected FY01 results - very cheap by Net standards. Maybe that's why the company decided to buy back $100 mln of its own stock. Now there aren't many Net companies in position to do that. Yet another reason cash is king. |
