Where Is The Cash?

| About: Henry Schein, (HSIC)

Stocks, by the dozens, are hitting their 52-week highs. Joe Terranova, in his book "Buy High Sell Higher," posits the strategy that buying high means buying confidence. The strategy is based on the supposition that stocks hitting their highs are not only showing the sentiment of the market but are also showing conviction from investors. One of the first steps in analyzing such a stock is to take a hard look at the fundamentals of the company. Is the stock just hot or does the company have quality assets with solid performance data?

Two stocks that have hit 52-week highs in the past 10 days are Henry Schein, Inc. (NASDAQ:HSIC) and Trimble Navigation Limited (NASDAQ:TRMB). Both companies are multinationals and leaders in their respective industry - Henry Schein in the healthcare sector and Trimble in the scientific and technical instruments sector.

Henry Schein is the largest provider of healthcare products and services to medical, dental, and veterinary practitioners in 25 countries. It offers an extensive selection of dental supplies, medical supplies, pharmaceuticals, equipment, and even software technology. Henry Schein strives to be a one-stop shop for its customers boasting 90,000+ SKUs in stock with an additional 19,000 SKUs in the veterinary sector. Not resting on providing quantity, quality is also a target measure. Its efficiency in delivery is reflected in its 99.9% order accuracy achievement. Henry Schein's vision is to transition from a pure distribution company to its customer's partner with the common goal of improving the quality of care.

Trimble Navigation provides positioning technologies and information to allow its customers to collect, manage, and analyze position and location data for field and mobile workers to improve productivity and ensure safety. Trimble has offices in 30+ countries and sells products to over 141 countries. Positioning is more than a dot on a map; positioning allows worker identification and monitoring as well as the monitoring of asset utilization, fuel consumption, carbon emission and safety compliance. Trimble assists its customers in exploiting the value of bundling software, hardware and services.

Henry Schein and Trimble are both increasing revenue year over year. Both are growing net income and earnings per share year over year. Since 2007, Henry Schein's compound annual growth rates (OTCPK:CAGR) for sales, net income and earnings per share (EPS) are double-digits - 11% for sales and 15% for net income and EPS. Trimble's CAGR for sales over the past five years is 12%. However, neither pay a dividend returning profit to shareholders.

So, where's the cash? In the trailing twelve months, Henry Schein earned over $100 in revenue per share. But in the most recent quarter, it has only $1.01 in cash per share. Similarly, Trimble has only $1.12 in cash per share. Seriously, where IS the cash?

First of all, both companies rely heavily on acquisitions for growth. Henry Schein has integrated over 50 acquisitions in the eight years since 2005, seven of those in 2012. Trimble has acquired 53 companies since 2005, 10 in 2012, as well as signed agreements for five joint ventures.

In the healthcare industry, consolidation is common. Henry Schein's approach to such consolidation is to look for candidates that provide expanding products and services. Its trend has resulted in a continued focus on its core business where expansion complements existing operations and synergies develop with the acquired businesses. Growth since 2007 has been more a result of acquisition than internal growth. Henry Schein intends to continue to take advantage of the consolidation trend and to ensure it is capitalized to execute.

Trimble's positioning products and technologies are used in heavy construction, engineering and construction including building information modeling (BIM), mapping and surveying, transportation logistics and agriculture industries. Trimble uses acquisitions to establish a presence in new markets, eliminate gaps in product lines, and add new technologies. Trimble has migrated from its initial business model of providing GPS "box products" to the present mentality of providing a portfolio of products and solutions with the goal of enhancing its customer's productivity. Trimble intends to drive growth through this type of acquisition strategy combined with a continued investment in R&D.

Through the third quarter of 2012, Henry Schein had spent just over $206 million of its $1,844 million gross profit or 11% on acquisitions. Trimble had spent just over $355 million of its $790 million gross profit or 45%. Even with the abundance of acquisitions, further explanation is warranted to the question "Where is the cash?" for both companies.

In Henry Schein's case, it has an active stock repurchase program. It originated in 2004 and has had additional authorizations five times since. As of the September 2012 quarterly reporting, Henry Schein has repurchased nearly 13 million shares for $716 million under the program, spending nearly $216 million of the $716 million in the first three quarters of 2012. The total number of shares is a net effect of the repurchases offset by unvested stock and the exercise of options. For example, in the first three quarters of 2012, 2.88 million shares were repurchased but the net decrease was only 1.66 million shares.

In Trimble's case, it believes to maintain its competitive advantage, it must invest in research and development. Trimble holds over 1800 patents and focuses on not only developing new products but also enhancing existing products and promoting products for market acceptance. Products are developed or enhanced to improve performance, add features, decrease size or weight, or lower cost. Trimble's average spend on R&D compared with revenue is 12%. Through the third quarter of 2012, R&D spend is 23.5% of gross profit.

While 2013 still has a level of uncertainty in regard to world economics and construction hesitancy, Trimble is positioning for growth. Trimble Navigation is forecasting five-year revenue growth at 15%-17% per year by further international expansion and market penetration. It is also expecting to grow operating margins from the current 11+% to 20+% by continuing to transition from just sensors to hardware, software and service solutions.

Henry Schein points to the aging population as a major driver of healthcare spending. The industry tends to be recession resistant as well. Besides acquiring new customers, Henry Schein plans to migrate from strictly distribution to providing value-added products and services. It is also utilizing customer loyalty programs to retain and reward valuable customers.

Neither Henry Schein and Trimble Navigation have much cash per share. But, both know where its cash IS going. And, both have a track record of growing revenue and a handle on how to continue. As annual reports are published in February, proponents of "buy high, sell higher" should consider adding Henry Schein and Trimble Navigation to their reading lists.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.