Cash, they say, is king.
If that's true -- and after the financial crisis we can all agree that it is -- then these 10 companies must be the masters of the universe.
|Company (Ticker)||Cash/Near Cash|
|General Electric (NYSE: GE)||$61.4 Billion|
|Berkshire Hathaway (NYSE: BRK-B)||$26.9 Billion|
|Ford (NYSE: F)||$25.8 Billion|
|Merck (NYSE: MRK)||$21.8 Billion|
|Oracle (Nasdaq: ORCL)||$16.2 Billion|
|Hewlett-Packard (NYSE: HPQ)||$13.3 Billion|
|Dell (Nasdaq: DELL)||$12.8 Billion|
|ExxonMobil (NYSE: XOM)||$12.5 Billion|
|Google (Nasdaq: GOOG)||$12.1 Billion|
|Johnson & Johnson (NYSE: JNJ)||$11.9 Billion|
Each of these blue-chip companies has more than $10 billion in the cash and near-cash line on its balance sheet. Together, their collective cash hoard is a staggering $214.6 billion.
To put that number in perspective, $215 billion would buy each and every resident of Atlanta a $325,000 house AND a new Cadillac Escalade.
Not only is the cash line on the balance sheet strong, the bottom line of the income statement is also robust. What's more, the likelihood of these companies continuing to post massive profits in the future is very high. Consider: In the 90 days that made up the third quarter this year, these 10 companies earned a profit of $22.3 billion. In other words, even in a down economy mired in recession, these astonishing businesses collectively made more than $100 million in profit every hour of every day, seven days a week.
The question, of course, is whether these cash-rich companies are good investments. Today, we'll look at the top two companies, and follow up with the seven remaining companies on Thursday and Friday.
No. 1: General Electric Co. (NYSE: GE), $61.4 billion
For experienced investors, General Electric is the House that Jack Built. Jack Welch, the conglomerate's CEO from 1981 to 2001, took a stodgy industrial manufacturer and turned it into one of the leaders in power generation, health care and financial services. Welch wanted GE to be No. 1 or No. 2 in every business in which it participated, and managers either met that goal or they went to work somewhere else. Now, the company is lead by Welch's hand-picked successor, Jeffrey Immelt, and it occupies much the same vaunted position. The case can be made, and made compellingly, that GE is a proxy for the overall U.S. economy.
As any student of Machiavelli will tell you, a company's greatest strength is also its greatest weakness. And when the financial panic hit, GE was one of the companies that bore the brunt of the blow. In early March of this year, as the market circled the bowl and the Dow plunged to a gut-checking 6,500, things looked very bad for GE, which derived a significant source of its revenue by making loans that many of its customers suddenly looked unable to repay.
The falloff was dramatic. In December 2008, GE shares were trading at about $20. By March 4th, they'd fallen to a low of $5.73, a loss of more than -70%.
When -- and to some degree before -- the financial crisis struck in early fall of 2008, GE took a number of unusual steps to avert sure and certain financial Armageddon.
First, it sold stock to raise cash. The move was extraordinarily well timed: The company sold 547.8 million shares at $22.25 each on Oct. 8, 2008, which brought in $12 billion.
At about the same time, GE also accepted a $3 billion loan from Warren Buffett. GE might have thought its underwriters charged steep fees to sell its shares, but their cut was nothing compared with the terms Buffett exacted on his loan: Perpetual preferred stock that pays a 10% dividend and can only be bought back after three years -- and even then only at a 10% premium. Buffett also received warrants to buy $3 billion worth of common stock within the next five years.
In the meantime, the federal government stepped in to guarantee some of GE's debt, a program the company has since started weaning itself from as investors started showing they were once again willing to shoulder some measure of the risk. That a company with a long-standing AAA credit rating from Standard & Poor's needed a guarantee underscored the severity of the financial crisis. For a brief interlude, the composite rating on the triple-A bond shot up above 10% and investors practically gave GE debt away, pushing its bond prices to bargain-basement levels. S&P cut its rating; GE cut its dividend and the Dow began to climb out of the gutter.
These moves collectively allowed GE to stay afloat. Its shares have since rebounded to about $16, which values the company at about 12 times earnings. That's a discount from its historical average of 16.2 and well below the S&P 500's composite earnings multiple of 22.2.
GE, which remains profitable, is on track to earn $1.00 a share this year, a massive -48.2% decrease from the year before. Immelt has signaled that the company will actively seek huge government projects and thinks they will mean $192 billion to the company during the next three years. The consensus estimate for 2010 is a ridiculously low $0.90 a share. I think earnings of between $1.25 and $1.50 are far more likely as the economy rebounds and Immelt brings in government contracts. If management can indeed deliver those kinds of results, Wall Street will be reminded of the earning machine that GE has traditionally been, and I think its P/E will rise to its typical 20. This, to my way of thinking, implies a 12-month price target of $30. With that in mind, and continued growth from there back to the company's historical revenue and earnings levels, I think the shares could be an exceptionally strong long-term buy.
So does Warren Buffett.
His warrants allow him to buy $3 billion worth of stock within five years. But the key to a warrant isn't the time frame, it's the exercise price. Buffett can buy stock at $22.25 a share, which means he clearly thinks the stock's value will be well above that by the time the warrants expire in 2013.
Investors interested in following Buffett's lead can do so by adding these shares to their portfolio and just letting them sit. My prediction: Buffett will exercise that warrant and double his money, and investors who buy now will do even better.
No: 2: Berkshire Hathaway (NYSE: BRK-A), $26.9 billion
One of Warren Buffett's most endearing qualities is the way he phrases things. The guy is the king of the understatement. In a shareholder letter years ago Buffett said something to the effect of, "We always keep plenty of cash on hand." That's like saying Andy Roddick generally serves hard. Plenty of cash on hand? How does $26.9 billion strike you?
Debt, as Buffett would tell you, always limits options. Cash always creates opportunities. It can allow a company to weather a storm and survive when its competitors can't. It can mean a business doesn't need to seek outside financing to pursue a new opportunity. And if you want to ensure a deal goes through, showing up with cash is a good opening salvo.
Berkshire Hathaway, Buffett's holding company, owns insurance companies and utilities. It also has a host of subsidiary businesses that Buffett has bought over the years, from NetJets to DairyQueen and Fruit of the Loom. Berkshire also has immense stakes in about a score of public companies, including Wells Fargo (NYSE: WFC), Coca-Cola (NYSE: KO) and American Express (NYSE: AXP). Buffett, who had been buying up railroad stocks, recently bought No. 2 U.S. railroad Burlington Northern Santa Fe (NYSE: BNI).
Buffett's record, over time, speaks for itself. The first item in the annual report is always the same: The change in the company's book value, or shareholder equity, which he compares to the total return of the S&P 500. Buffett's growth in book value since he took over Berkshire in 1964 has been +362,319% versus a gain of +4,276% in the S&P. He has warned that such outsize growth simply cannot continue -- as the law of large numbers finally caught up with him -- but he still does a pretty good job of making money for his shareholders, and he and his partner Charlie Munger are two of the smartest and savviest businessmen in the world.
That's all well and good, but what's really going to make the difference this year to Berkshire Hathaway is its first split. As part of the Burlington deal, the company is engineering a 50-for-1 split. Owners who now have one share of B worth $3,400 will soon have 50 shares worth $68. (50 times $68 = $3,400.) While this doesn't erase or create any wealth in and of itself -- as the market cap stays exactly the same -- the move will likely create a run on Berkshire. This is a good thing: Berkshire grows. It makes money. And it has the best management in the world. There's no earthly reason it should trade at a -20% discount to the S&P. One of the reasons Wall Street has a hard time unlocking the value of this company is its arbitrarily high share price. The split will correct that.
Why? Because everyone who invests wants a piece of Buffett in his portfolio. For most investors, though, he's long been out of reach. A single share of B represents a sizable chunk of change, and an "A" share, currently selling for about $100,000, exceeds the equity many investors have in their homes. But that's changing. After the split, a round lot of Berkshire -- that is, 100 shares -- will require the same capital as a similar stake in United Technologies (NYSE: UTX) or Nike (NYSE: NKE). I think Berkshire will rise to $100 a share on this demand alone.
That's not a bad reason to jump on the Berkshire bandwagon, but it might be short-sighted. Its cash hoard, on the other hand, is a great reason. No one has ever put cash to work more effectively than Buffett. That's a point he has conclusively proven with the aforementioned GE loan, a similar deal with Goldman Sachs (NYSE: GS), and his recent stake in lithium-ion battery pioneer BYD Corp, which has risen +825% since he bought the stock in fall 2008.
Do I think Berkshire is a buy? Absolutely.
On Thursday, we'll look at the next four companies on the list.