forbes.com Stock Focus: Companies With Low Debt
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Forbes.com
Stock Focus: Companies With Low Debt
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``Debt is a fixed expense,'' explains David Elias, president and chief investment officer at Elias Asset Management, ``so when revenues take a hit, you've got a problem.'' This also means that companies without a heavy debt burden are better prepared to ride out a business slowdown.
Some industries, despite their great need for new plants and equipment, typically do not carry a lot of debt. The best example is semiconductors. Intel's (Nasdaq: INTC - news) debt to equity is only 2%. ``The capital intensity and unpredictability of the semiconductor business has typically argued against debt financing,'' says Richard Whittington, semiconductor analyst at Banc of America Securities. Whittington notes that the big chipmakers have little trouble raising money in the equity markets.
Most industries, however, rely on the fixed-income markets more than semiconductor companies. Our table lists five companies with less leverage than the average firm in their respective industries. All trade at no more than 17 times estimated 2001 earnings versus 22 for Standard & Poor's 500. And all these companies have three- to five-year earnings growth forecasts of at least 15%.
Kenneth Cole Productions (NYSE: KCP - news), a New York-based designer of footwear, handbags and accessories is virtually debt-free. ``Their management is reluctant to take on debt,'' affirms Steven Marotta, an analyst at Wasserstein Perella Securities, ``and now they're generating so much cash, they certainly don't need to borrow.'' In contrast, the average apparel and footwear company has debt equal to 20% of equity.
Analysts reporting to IBES International project that Kenneth Cole will post average annual earnings gains of 25% over the next three to five years. The stock carries an estimated 2001 multiple of 17 and currently trades 27% off its 52-week high of $50.50.
Mountain View, Calif.-based Ditech Communications (Nasdaq: DITC - news) has also managed to keep its balance sheet free of debt. The company, a developer of echo cancellation equipment that enables better communications over fiber-optic networks, is projected to post a 38% earnings gain over the next three to five years. In its most recent quarter, Ditech's revenue was 73% higher than the October quarter last year. Shares of Ditech trade at just eight times its 2001 earnings estimate of $2.13 per share.
While not trading quite as cheaply as Ditech, Tex.-based information services provider Perot Systems (NYSE: PER - news) also has a clean balance sheet and $248 million in cash and equivalents. Perot Systems also seems well positioned to weather the dot-com downturn. In late October, for example, the company broadened its service portfolio when it acquired Health Systems Design, an Oakland, Calif., software concern catering to health care providers. Perot Systems' share price is 61% off its 52-week high.
Stocks Of Companies With Low DebtPrices as of Dec. 15; EPS = Earnings per share; * Annualized; projected over the next three to five years; Sources: IBES International and Market Guide via FactSet Research Systems Company Price Change From 52-Week High 2001 Estimated EPS 2001 Estimated P/E EPS Projected Growth* Market Value (mil)
Ditech Communications (Nasdaq: DITC) $17.75 -87% $2.13 8 38% $ 523
Ethan Allen Interiors (NYSE: ETH) 29.38 -12 2.42 12 15 1,156
Hot Topic (Nasdaq: HOTT) 30.06 -30 2.51 12 30 303
Kenneth Cole Productions (NYSE: KCP) 36.75 -27 2.19 17 25 755
Lightbridge (Nasdaq: LTBG) 7.81 -77 0.84 9 21 137
Perot Systems (NYSE: PER) 10.88 -61 0.63 17 21 1,065 |
