Inside Wall Street: 3 value plays with plenty of cash

A Texas money manager likes Time Warner, Honda and Garmin.

By Gene Marcial Dec 13, 2011 11:00AM

Tetra Images/Tetra images RF/Getty ImagesJeanie Wyatt is a true-blue value investor. But she is more particular about the term value than many of her peers. She loves to see a hoard of greenbacks on a company's balance sheet. If a company doesn’t have plenty of cash, she won’t tag it as a value play.

 

Most investment managers identify value stocks as companies with underappreciated and undervalued assets that have yet to be reflected in the price of their stock. In other words, investors haven’t yet paid up for their intrinsic worth.

 

The importance of cash flow

Wyatt, chief executive and chief investment officer of South Texas Money Management, agrees with such classification of value plays, but she wants one added element: robust cash flow. A value stock, Wyatt insists, must possess an undeniably attractive price-to-cash-flow multiple. She argues that a stock with a relatively low price-to-cash-flow ratio, in the neighborhood of three to five times, gives a company lots of flexibility to execute its goals.

 

Wyatt argues that a strong cash flow makes a company look more credible, and usually gives it an edge over competitors, "because no matter how you slice it, cash is king." Yet many times, value plays are out of favor particularly during economic downturns. she notes. That's because most investors then care more about growth, so cash flow gets little attention. But when stocks are out of favor, it means their price-to-cash-flow ratios are depressed, and that’s an opportunity. "I just love out-of-favor stocks," says Wyatt.  

 

Wyatt says she also favors growth stocks, "but if a stock has both growth and value characteristics -- with tremendous cash flow to boot -- so much the better."


Among her stock choices of cash-rich value plays are major media conglomerate Time Warner (TWX), large global auto maker Honda Motor (HMC), and leading designer and maker of GPS-enabled products Garmin (GRMN).


Time Warner cash flow continues to improve

Time Warner, which owns some of the world’s leading media and entertainment brands, is one of those long out-of-favor stocks. But it has gained some traction more recently with its stock rising to $33 a share, up from a 52-week low of $27.62. It is unusual for Wyatt to buy a stock like Time Warner, whose price-to-cash flow ratio is quite high, at around 8. But the company pays a dividend yield of 3%, notes Wyatt, and its cash flow continues to improve.

 

Moreover, Time Warner has "clear positive earnings visibility," she says, as reflected in its encouraging third-quarter results that prompted management to lift its full-year 2011 earnings outlook. Time Warner, which generated free cash flow of $2.7 billion in 2010, is expected to see it to go much higher in 2012, to $3.2 billion, up from an estimated $2.1 billion in 2011. In per-share earnings, analysts forecast $2.87 a share for 2011, and $3.21 in 2012. Wyatt has a 12-month stock price target of $45 a share for Time Warner.


Taking advantage of Honda's recovery

Honda, one of the world’s largest automakers, was badly affected by the recent Tsunami that hit Japan and the heavy floods in Thailand. The disasters hurt its sales and earnings for fiscal 2012 ending on Mar. 30. The stock had fallen to a 52-week low of $27 after the Japanese tsunami and flooding in Thailand. The stock has edged higher since then, to $30.


Wyatt’s investment firm bought shares several months after the tsunami and floods hit, as the events pulled down not only its stock price but its price-to-cash-flow ratio, as well. The price-to-cash flow ratio fell to 3 times, but Wyatt expects the multiple to climb back to 5 as Honda’s production recovers and comes back to normal levels in 2012. Auto industry analysts see improving earnings prospects for Honda as they look beyond the crisis in Japan and expect industry volume to rise in the years ahead.

 

With Honda’s dividend yield of 2.5%, the stock that traded as high as $39 before the tsunami disaster is undervalued, says Wyatt. In fiscal 2011, Honda's cash flow rose to $10.7 billion from fiscal 2010's $7.2 billion. Some analysts see the stock racing back up to $39 again over the next 12 to 18 months.


Garmin's stock could double in a year

Garmin is a big favorite of Wyatt’s as she expects its stock, now trading at a 52-week high of $38 a share, to double in 12 to 28 months. The company makes an array of portable hand-held and fixed mount Global Positioning System-enabled products for both the aviation and consumer markets. Wyatt says the company’s robust cash flow enables the company to pursue various options for growth. She expects Garmin, for example, to come out before long with a wristwatch that shows vital GPS data and information. That should be a blockbuster product, she thinks.

 

Garmin’s strong balance sheet has cash of $1.5 billion and no debt. Also encouraging is its strong cash flow that allows the company to pay a healthy dividend yield of 5%, says Wyatt. "Garmin is very attractive stock even with its recent strength," she says.

 

This trio of value stocks, enhanced by their strong cash flows, should be formidable portfolio holdings during the volatile and uncertain market environment we are witnessing, says Wyatt.



Gene Marcial wrote the Inside Wall Street column for Business Week for 28 years and now writes the column for MSN.com. He also wrote the book, Seven Commandments of Stock Investing, published by FT Press.
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