Free cash flow is important for the company to pursue opportunities to enhance shareholder value, but it does not have to be expensive. In this article, four technology stocks with cheap free cash flow, which are also on the long-term uptrend, will be presented. They are Oracle Corporation (ORCL), Broadcom Corporation (BRCM), BMC Software, Inc. (BMC), and Cadence Design Systems Inc. (CDNS).
Oracle, with a market cap of $158.41B, is a provider of enterprise software and computer hardware products and services, including databases, middleware and applications.
On March 25, 2013, Macquarie reiterated a neutral rating for ORCL with a price target of $36.00. Analysts currently have a mean target price of $37.72 for ORCL, suggesting 12.73% upside potential based on the closing price of $33.46 on April 12, 2013. Analysts, on average, are projecting an EPS of $0.88 with revenue of $11.14B for the current quarter ending in March, 2013.
Fundamentally, ORL has a high operating margin of 38.44% and the long-term EPS growth is expected to be 10.66% for the next five years. ORCL has a solid balance sheet with a total cash of $33.41B and a total debt of $19.75B. From the valuation perspective, ORCL offers a cheap free cash flow (P/FCF of 13.94) with a low Forward P/E of 11.42.
Technically, ORCL continues to be on the long-term uptrend since mid-November, 2012. ORCL had bounced back from its long-term support after it missed its earnings in the last quarter.
In short, ORCL continues to grow through M&A strategies and has successfully prepared itself for cloud computing. With a solid cash flow, high margins, strong balance sheet, ORCL remains an attractive buy at current valuation. For bullish investors, a credit put spread of June 22, 2013 $29/$31 put can be reviewed, which will allow investors to gain some upside credit premium or to acquire ORCL shares at a price below $31 upon options expiration.
Broadcom, with a market cap of $19.27B, is a technology innovator and provider of semiconductors for wired and wireless communications, including system-on-a-chip (SoC) and software solutions.
Analysts currently have a mean target price of $40.10 for BRCM, suggesting 18.39% upside potential based on the closing price of $33.87 on April 12, 2013. Analysts, on average, are estimating an EPS of $0.56 with revenue of $1.91B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $2.77 with revenue of $8.45B, which is 5.50% higher than 2012. BRCM is expected to release its Q1, 2013 earnings on April 23, 2013.
Fundamentally, BRCM has a healthy balance sheet with a total cash of $2.37B and a total debt of $1.69B. BRCM generates a steady cash flow of $1.93B with a levered free cash flow of $1.29B. BRCM offers a good mix of income and growth with an estimated annual EPS growth of 15.00% for the next five years. From the valuation perspective, BRCM is currently trading at an attractive valuation with a Forward P/E of 11.03. BRCM also offers an inexpensive free cash flow (P/FCF of 13.22).
Technically, BRCM is on a steady long-term uptrend since December, 2012. However, BRCM is approaching its 50-day MA of $33.91, and it is crucial to see if BRCM can break through this major resistance to determine its near-term direction.
In short, BRCM is expected to benefit from global LTE development, such as China Mobile (CHL)'s huge $30.6B CapEx for TD-LTE. In addition, BRCM had been working with SK Telecom (SKM) to roll out the industry's first 5G WiFi hotspot router. SK Telecom can provide more reliable connectivity via a fast and robust 5G WiFi connection by integrating Broadcom's BCM4708 and BCM4360 into its newest platform. BRCM's outlook remains positive, which is supported by its healthy balance sheet and steady cash flow.
BMC Software, Inc.
BMC Software, with a market cap of $6.42B, is a software company, providing information technology management solutions. BMC has a relatively low beta of 0.55.
Analysts currently have mean target price of $44.45 for BMC, suggest is below BMC's current price of $44.93 (as of April 12, 2013). Analysts, on average, are predicting an EPS of $0.93 with revenue of $591.27M for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $3.42 with revenue of $2.22B, which is 2.40% higher than 2012.
Fundamentally, BMC is facing strong competitions from larger rivals, such as Oracle and SAP AG (SAP). BMC is able to maintain higher-than-industry average margins, but its revenue growth is lagging the industry average. BMC's balance sheet with a debt/equity ratio of 1.9 is weaker compared to the industry average of 0.3. However, from the valuation perspective, BMC's P/E of 21.9 is much below the industry average of 55.9. BMC also offers a low-priced free cash flow (P/FCF of 13.56).
Technically, BMC is on a gradual long-term uptrend since August, 2012.
In short, BMC is a good buyout target with its solid, reasonably priced free cash flow. As reported, BMC is expected to receive final takeover bids on April 22, with potential buyers pared down to two private equity groups. According to the unidentified source, the offer could range from mid-to upper $40 per share. BMC remains a good buy for its free cash flow.
Cadence Design Systems, Inc.
Cadence Design Systems, with a market cap of $3.75B, develops electronic design automation, software & hardware, and silicon intellectual property. Cadence generates revenue by licensing software and IP, selling or leasing hardware technology and providing engineering and education services.
Analysts currently have a mean target price of $16.31 for CDNS, suggesting 22.08% upside potential based on the closing price of $13.36 on April 12, 2013. Analysts, on average, are estimating an EPS of $0.19 with revenue of $347.34M for the current quarter ending in March, 2013. For 2013, analysts are predicting an EPS of $0.89 with revenue of $1.43B, which is 8% higher than 2012. CDNS is expected to release its Q1, 2013 earnings on April 24, 2013.
Fundamentally, CDNS generates a strong ROE of 66.3 (vs. the industry average of 15.5) with a high net margin of 33.2% (vs. the average of 13.2%). CDNS has a healthy balance sheet with a total cash of $827.05M and a total debt of $447.01M. CDNS also generates a steady operating cash flow of $315.99M with a levered free cash flow of $179.10M. CDNS also has a higher revenue growth in the past three years (15.9) as compared to the industry average of 6.4. From the valuation perspective, CDNS is currently undervalued (P/E of 8.5 vs. the industry average of 55.9).
Technically, CDNS continues to be on the long-term uptrend since late July, 2012. However, CDNS is currently trading near its long-term uptrend support while fluctuating between its 50-day MA of $13.92 and 200-ay MA of $13.05.
In short, CDNS will continue to benefit from its collaboration with TSMC with an ongoing multi-year agreement to develop the design infrastructure for 16-nanometer FinFET technology. CDNS offers a good mix of income and growth, supported by a healthy balance sheet, and is still undervalued.
While all four stocks offer inexpensive cash flow with solid fundamentals, BMC could be bought out shortly while BRCM and CDNS are expected to release earnings on April 24, 2013, where more volatility may be expected. In the meantime, ORCL remains the most solid play and any pullback is a good long-term buying opportunity.
Note: Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.