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Balance-Sheet Powerhouses


John Dorfman , president of Dorfman Investments in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or its clients may own or trade investments discussed in this column.

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EBay and Microsoft Are Balance-Sheet Powerhouses: John Dorfman
March 15 (Bloomberg) -- Remember Scrooge McDuck from comics of yore? He would sit on a pile of cash and diamonds, relishing the feel of his wealth.

Few of us will ever know McDuck's smug feeling. As consolation, we can invest in companies that are cash rich and have few if any debts.

For companies, a strong balance sheet -- lots of assets and little debt -- provides staying power, the ability to take advantage of strapped competitors, and the power to seize unexpected opportunities.

Every year, I compile a list of ``Balance Sheet Powerhouses.''

Microsoft Corp. (MSFT) and Forest Laboratories Inc. (FRX) have made my balance-sheet honor roll six years in a row -- each year since the beginning in 2001. EBay Inc. (EBAY) and Qualcomm Inc. (QCOM) have been honored five times each.

Google Inc. (GOOG), which began trading publicly in 2004, is on the list for a second time, and looks likely to stay. As of Dec. 31, it had $3.88 billion in cash and near cash, $4.16 billion in marketable securities, and no debt.

Powerhouse Terms

To be a Balance Sheet Powerhouse, a stock must meet six standards:

* A market value of $1 billion or more.

* Long-term debt of $200 million or less.

* $300 million or more in cash or near-cash.

* Total debt less than 10 percent of stockholders'

* equity.

* A current ratio (current assets divided by current

* liabilities) of 2-to-1 or more.

* Earnings of at least 10 cents a share in the latest

* fiscal year.

Being on the Powerhouse list is an honor, but not necessarily a stock recommendation. In many cases, the excellence of the companies is already reflected in the stock price.

Since 2001, the stocks on the Balance Sheet Powerhouse list have returned an average of 10 percent in the 12 months after their listing.

That beat the average return on the Standard & Poor's 500, which has been 3.9 percent. Still, I wouldn't call it a spectacular result.

Moral Point

Most years, I have recommended a few of the Balance Sheet Powerhouses that, in addition to financial strength, have stocks that are fairly cheap. The average annual return on my recommended stocks has been 31 percent.

Moral: Financial strength plus a cheap stock beats financial strength alone.

I blew it last year, however. My two recommendations -- Forest Labs and Timberland Co. (TBL) -- returned an average of only 2.7 percent from Feb. 17, 2005, through March 13, 2006.

Over the same period, the Powerhouses as a group returned 21 percent and the S&P 500 returned 9.1 percent. All figures include dividends.

This year, 42 companies make the Balance Sheet Powerhouse list, beating last year's record of 38.

Three Bargains

Three strike me as cheap.

I recommend Ashland Inc. (ASH), Intergraph Corp. (INGR) and American Eagle Outfitters Inc. (AEOS).

Ashland, which I own for clients and personally, is the largest U.S. road builder. The Covington, Kentucky, company also produces chemicals and makes Valvoline motor oil.

Ashland sells for bargain valuations -- five times earnings, 1.3 times book value (assets minus liabilities per share) and 0.5 times revenue.

The company has turned a profit in 18 of the past 19 years. As of Dec. 31 it had $985 million in cash and $403 million in marketable securities, against $94 million in long-term and short-term borrowings.

Intergraph, based in Huntsville, Alabama, makes software used for mapping and other visual representations of data. It is a high-risk pick because analysts expect earnings to fall in 2006 to about $1.33 a share from $3.83 a share last year.

As of Dec. 31 Intergraph had $307 million in cash and near cash, with less than $1 million in borrowings. I own the stock for a few clients.

Soaring and Diving

American Eagle, a clothing retailer with headquarters in Warrendale, Pennsylvania, has more than $751 million of cash and near cash on its books as of Jan. 31. The balance sheet shows no debt, long-term or short-term.

American Eagle stock makes big moves in both directions. For example, it was down 47 percent in 2002 and up 187 percent in 2004. Today, I consider it reasonably priced at 15 times earnings.

Here is the full list of this year's Balance Sheet Powerhouse honorees:

Six-time winners: Forest Labs and Microsoft.

Five-time winners: EBay and Qualcomm.

Four-time winners: Foundry Networks Inc. (FDRY), Imation Corp. (IMN), KLA-Tencor Corp. (KLAC) and National Semiconductor Corp. (NSM).

Three-Time Winners: Altera Corp. (ALTR), Analog Devices Inc. (ADI), Apple Computer Inc. (AAPL), AVX Corp. (AVX), Circuit City Stores Inc. (CC), Compuware Corp. (CPWR), Electronic Arts Inc. (ERTS), Gentex Corp. (GNTX), Novellus Systems Inc. (NVLS), Robert Half International Inc. (RHI) and Sandisk Corp. (SNDK).

Two-time winners: Adobe Systems Inc. (ADBE), Broadcom Corp. (BRCM), Google, Linear Technology Corp. (LLTC), W.W. Grainger Inc. (GWW) and Xilinx Inc. (XLNX).

Newly added: American Eagle Outfitters, AnnTaylor Stores Corp. (ANN), Ashland, Biogen Idec Inc. (BIIB), Ceridian Corp. (CEN), Claire's Stores Inc. (CLE), Cogent Inc. (COGT), Dolby Laboratories Inc. (DLB), Guidant Corp. (GDT), Intergraph, Kos Pharmaceuticals Inc. (KOSP), Lam Research Corp. (LRCX), Michaels Stores Inc. (MIK), Molex Inc. (MOLX), Nvidia Corp. (NVDA), Stryker Corp. (SYK) and Tellabs Inc. (TLAB).




To contact the writer of this column:
John Dorfman in Newton Centre, Massachusetts [e-mail]

Last Updated: March 15, 2006 00:19 EST