The pandemic has brought all sorts of changes to how corporate America operates. Business models are shifting to e-commerce and expenses on things like travel and marketing are being re-examined.
Another major development is the amount of cash companies are piling up. While economic conditions have improved dramatically, the ongoing uncertainty associated with the spreading delta variant has many companies keeping their cash stash well padded.
Whether from debt or equity financing or simply hanging on to profits, S&P500 companies now hold over $2 trillion in cash. What are investors to make of this unprecedented situation?
People buy stocks for capital appreciation and income generation. Accordingly, investors want to see that cash deployed for organic growth opportunities, acquisitions, dividends, and share buybacks. It can be a good investment strategy to identify companies that have a mix of high cash balances and growth prospects that could lead to some strong returns as cash is put to work.
Let’s look at three cash-rich companies that are worthy of investors’ cash.
How is Carrier Global Using its Cash?
Carrier Global (NYSE: CARR) is best known as the name on your air conditioning unit, although it provides a range of HVAC, refrigeration, fire protection, security, and building automation products and services. Things are looking up in the business due to robust residential and commercial construction activity.
What is also up is Carrier’s cash position which has swelled to $2.6 billion. Last quarter management struck an upbeat tone about the company’s growth outlook, increased the quarterly dividend by 50%, and announced a new stock buyback program. Investors should take comfort in these moves because they show management is focused on rewarding shareholders. And although some of the remaining cash will need to be used to pay down Carrier’s $9.7 billion debt load, it’s reasonable to expect that additional shareholder friendly moves are forthcoming.
The added financial flexibility also gives Carrier the chance to explore value -added takeover candidates. There are several attractive companies in the fragmented HVAC space. So, between the M&A potential, rising dividend, buyback program, and reasonable valuation, Carrier Global stock should be heating up.
Is CarMax Stock a Buy?
Used car retailer CarMax (NYSE: KMX) hauled in $19 billion in revenue in its most recent fiscal year. As many Americans shunned subways, buses, and air travel in favor of driving, much of the money has been flowing to pre-owned vehicle dealers. And with both physical and online storefronts, CarMax has become a two-headed growth monster.
CarMax sits on $378 million of cash which is less than it had a year ago but still a large amount for a company its size. The debt balance of $16.7 billion appears daunting but since 85% of it is in the form of nonrecourse notes that don’t permit debtholders to access CarMax assets, it is quite manageable.
The healthy capital structure and buoyant used car buying environment gave management the confidence to bring back its stock buyback program. There is still a whopping $1.2 billion left in the program which means any dips in the share price are likely to receive the support of company purchases.
CarMax doesn’t pay a dividend and for good reason. It is still in the early stages of a long growth opportunity as consumer car buying habits continue to gravitate to digital platforms. Car buyers value self-service and convenience more than ever these days, and the company’s technology investments are well aligned with these trends.
Over the last few years, CarMax has been adding 10 to 20 stores to its national footprint. That pattern is likely to continue given the strong cash flow and where the industry is headed. Any weakness in CarMax’s share price should be viewed as an opportunity to park some funds in a growth company with plenty left in the tank.
How Much Cash Does Skechers Have?
Few mid-caps are as financially fit as Skechers U.S.A (NYSE: SKX). The emerging sneaker company is firing on all cylinders with strong wholesale, retail, and e-commerce businesses. Since more people are trading work shoes for casual footwear to accommodate remote work habits, global demand for the Skechers brand has been strong throughout the pandemic.
Skechers has more than $1.1 billion of cash on its books, a remarkable figure that amounts to almost 15% of its market cap. Its debt burden is modest and inventory levels are manageable. So, what is Skechers going to do with all this green?
For starters, it plans to continue to pay down debt which will further strengthen its financial position. The initiation of a dividend payment is unlikely given that the company is very much in growth mode. Skechers will therefore probably continue to capitalize on the current consumer spending environment by investing in its digital platform, building out its brick-and-mortar presence, and developing new sneakers and accessories.
International growth will also be a key part of the story going forward. This will come in the form of securing more international distribution agreements and opening new locations overseas. Success in emerging markets like China and India could serve as major step forward for the shoe retailer. Competition will undoubtedly be fierce especially from Nike, but Skechers’ balance sheet strength makes it a snug fit for long-term growth investors.
Before you consider Skechers U.S.A., you'll want to hear this.
MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Skechers U.S.A. wasn't on the list.
While Skechers U.S.A. currently has a "Buy" rating among analysts, top-rated analysts believe these five stocks are better buys.
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