Recession Rule #1: Cash Is King

In any downturn, cash is always harder to come by. In this environment, capital is especially hard to get. We've all heard the phrase "cash is king", and its usually true. But in this environment, it really is true. Companies with extra cash are better positioned to create a better competitive advantage over their competitors. This can be for a couple of reasons:

• Many companies need access to capital to finance expansions, or at a minimum daily operations. Companies with extra cash have no worries about getting credit downgrades or accessing capital if they need it.
• Cash rich companies can use the downturn to acquire smaller companies, or even competitors. When the market overshoots to the downside with market valuations, its a great time for companies with lots of cash to scoop up deals.
• Companies with lots of cash will always be attractive to investors, especially during the typical "flight to quality" that happens during market panics. Investments in these companies usually hold up better than their counterparts as investors get defensive.

In a recent interview, Cisco (CSCO) CEO John Chambers said "companies with cash are king, queen and the royal family." Cisco has close to $27 billion in cash and short-term investments, and the total continues to climb. hambers says Cisco is always aggressive in making acquisitions during downturns. He says the best time to make acquisitions is in downturns.

In another example, take a look at this quote from Nokia (NOK) CEO Olli-Pekka Kallasuvo,

When times are tougher, people who have stronger positions fare relatively better than the competition . . . So, overall, I believe many of our competitors will have limitations here in terms of their ability to do things.” Nokia has $4 billion net cash.

Nokia’s goal of increasing its market share in 2009 may also be assisted by the trend of consumers “trading down” to cheaper mobiles.

This is exactly what I've been talking about. Apple (AAPL) to PC, Blackberry (RIMM) to Nokia, Macy's (M) to Wal-Mart (WMT)... Not by choice, but necessity.

Some other companies with a lot of cash: Google (GOOG), Microsoft (MSFT), T Rowe Price, and Humana (HUM).

Cisco article via Barron's Tech Trader.

Nokia Article via Financial Times.

Disclosure: Author holds a long position in NOK

Comments

[investor88:]

Nice to hear Michael say cash is king not "cash is trash" as some gurus say.

Jan 11 07:54 AM

[Alan Brochs...:]

One suggestion: Look beyond simple line-item of cash and understand how much of it is unencumbered by liabilities. Often these liabilities aren't in the form of debt.

Look at CSCO, for instance. You correctly point out that they have $27 billion in cash. An obvious reduction is the $7 billion that they have in debt, primarily LTD. A not-so-obvious adjustment is that they have $13 billion in Current Liabilities beyond that included in STD. They have Current Assets of only $9 billion when one excludes the cash (a difference of -$4 billion). I would thus characterize the free cash available to the firm as $16 billion (subtracting the 7 + 4), still a nice chunk of change yet significantly lower than stated. It is actually slightly worse, as you need to look at the long-term deferred revenue, which represents paid sales that haven't been delivered.



There are much better examples

Jan 11 08:29 AM

[SingHash:]

Bait Rule #1 for aspiring financial writers: mention Apple but neglect to include any numbers; just give the wrong impression.

(As of last quarter, Apple has more cash than DELL, HPQ, IBM, & MSFT; only MSFT has better profit & margin stats.)

Jan 11 09:27 AM

[donzelion:]

I always thought Elvis was King! Seriously though, in or out of a recession, "Wisdom is king" - cash and debt are just transitional variables. Good management saves for rainy days and avoids foolish splurging. However, one measures the skill of management by its capacity to transform cash into enduring value - not the capacity to accumulate cash.

Jan 11 10:00 AM

[Roger Knights:]

"Nokia’s goal of increasing its market share in 2009 may also be assisted by the trend of consumers “trading down” to cheaper mobiles.

"This is exactly what I've been talking about. Apple (AAPL) to PC, Blackberry (RIMM) to Nokia, Macy's (M) to Wal-Mart (WMT)... Not by choice, but necessity."

The actual trend is for basic cell phone consumers to trade up to smartphones, and for PC users to trade up to Macs. It's legendary that Mac users are loyal to their platform. ("Once you bite, you're bitten," is the way I put it.) "Switchers" come from the PC side. Macs' share of the microcomputer market has been growing steadily, as has been widely reported.

Jan 11 06:28 PM

[Michael Brisky:]

Although the common trend is "trading up" as technology gets better and cheaper, I'm concerned about the next year or two. I agree Apple has very loyal customers, but I'm wondering about the person on the fence that wanted to "upgrade" to a Mac. Will they justify $1000+ vs half that?

Mac sales did decline 1% last month, but I'd have to see it a little longer before I'd consider it a trend.


On Jan 11 06:28 PM Roger Knights wrote:

> "Nokia’s goal of increasing its market share in 2009 may also be
> assisted by the trend of consumers “trading down” to cheaper mobiles.
>
>
> "This is exactly what I've been talking about. Apple (seekingalpha.com/symbo...)
> to PC, Blackberry (seekingalpha.com/symbo...) to Nokia,
> Macy's (seekingalpha.com/symbo...) to Wal-Mart (seekingalpha.com/symbo...)...
> Not by choice, but necessity."
>
> The actual trend is for basic cell phone consumers to trade up to
> smartphones, and for PC users to trade up to Macs. It's legendary
> that Mac users are loyal to their platform. ("Once you bite, you're
> bitten," is the way I put it.) "Switchers" come from the PC side.
> Macs' share of the microcomputer market has been growing steadily,
> as has been widely reported.

Jan 11 07:34 PM

[WALID:]

WELL... I totally disagree with the reporter eagarding Nokia and the smartphones! Nokia rules the world in smartphones! anywhere u go around the world u only see Nokia phone! the Nokia E71 smartphone blows away any smartphone available in the market including the overhypped Iphone and Blackberry Bold... For $450 u get an unlock Nokia E71 and for $280 u can get an unlock Nokia E63... People need to stop hypping the like Iphone and Balckberry bold crap!

Jan 11 09:40 PM

[Dan Jacome:]

who would HUM buy - they are more likely a target than buyer.

Jan 12 12:51 PM