Four Tech Companies with Tremendous Balance Sheets

I was just going through the financial data of some tech companies. I noticed four companies (and I am sure there are more) with tremendous balance sheets. Here is a quick look:

There is little chance that any of these companies will go bankrupt any time soon. I find it comforting to invest in companies with strong balance sheets.

Having spent a large amount of time studying Berkshire Hathaway (BRK.A) (from its inception with Warren Buffett), it is my belief that there are two important phases for a company - capital generation and capital allocation. Sometimes a great business can generate huge amounts of cash flow, only to throw it away on bad capital allocation decisions.

A real victim of horrible capital allocation is Microsoft (MSFT). They may be the best cash flow generator of the bunch, but the worst capital allocator. If anyone can show me a great capital allocation move from MSFT over the last five years, I would love to hear about it.

Apple (AAPL) and Cisco (CSCO) seem to be hoarding cash - it will be interested to see what they do.

Google (GOOG) is the real wild card. They are still a young company - I would imagine they will stockpile cash for a while.

It seems interesting to me that we may have witnessed one of the best buying opportunities in history with the DOW hitting 6,500. I find it interesting that none of these companies allocated much (if any) cash to equities.

Comments

[Option Trader:]

By allocating cash in equities, which one(s) are you referring to:

A. Buyback
B. Forming an equity portfolio (?)
C. Acquisitions

May 22 05:26 AM

[Dan Braem:]

Option Trader - (B) or (C).

I hate share buybacks - that is why I am down on Microsoft. By definition, buybacks destroy the capital structure and it gives cash to short-term holders. Long-term shareholders receive nothing.

To be more specific, I would say (B). In an era where almost every company is capital constrained, those with capital could make a lot of money. I think in the last two months you have seen many opportunities. Reminds me of when Berkshire bought its initial stake in GEICO - where GEICO was struggling but the additional capital made it worth more. You are seeing the same thing now with many insurers or banks.

May 22 09:39 AM

[AndrewBaker:]

Apple, Cisco and Google are all great long-term stocks to own. Microsoft is threatened by thin client/cloud computing and knows it. If they can get repositioned for this, then they would become a much better bet. Apple has its i-phone, whilst both Cisco and Google are slowly but surely getting in gear for cloud computing, and whilst they may be mature companies now, this will give them substantially more stock-price growth.

I don't own any of these right now, but have them on my watch list to get in when the imminent correction knocks the price back some.

May 22 02:52 PM

[Dan Braem:]

Andrew - I agree - Apple, Cisco and Google are all great companies (with great businesses). Google worries me a little bit not b/c of its main business but b/c of its propensity to enter a million different areas outside of its core competency. They remind me of a young Microsoft in that sense (not a good thing).

Microsoft still has a great core business, but who knows if it will continue over the next 20 years? The company is horrible at 1) reinventing itself and 2) reward shareholders. For those two reasons, I will never be a shareholder.



On May 22 02:52 PM AndrewBaker wrote:

> Apple, Cisco and Google are all great long-term stocks to own. Microsoft
> is threatened by thin client/cloud computing and knows it. If they
> can get repositioned for this, then they would become a much better
> bet. Apple has its i-phone, whilst both Cisco and Google are slowly
> but surely getting in gear for cloud computing, and whilst they may
> be mature companies now, this will give them substantially more stock-price
> growth.
>
> I don't own any of these right now, but have them on my watch list
> to get in when the imminent correction knocks the price back some.

May 22 05:05 PM

[Nettligent:]

Apple, Cisco, Google, and HQ are great companies with strong management, little or no debt, clean balance sheet, responsible company, excellent products and command a huge market share.
This is my dilemma and could not get answer.
Market expects these companies to grow and grow. It is reasonable expectation when these companies are young. They have done a great job.
How can these companies beat Earning quarter after quarter, year after year, at their size for the next 5 years?.Impossible tasks.

May 23 05:29 AM

[Option Trader:]

Going back to basics, why would i want to invest in a tech company managing an equities portfolio? I can do that myself and make a portfolio which is best suited for me rather than being forced to invest in a predefined mix. GEICO was a different case with an asset managment mandate and all. A tech company has no justification to channel cash into equities save for some strategic purposes. Spare cash, IMHO, should be ploghed back to ramp up R&D or just given out as dividends. A warchest is good thing but spare cash to the tune of ~1.5 times total liabilities is just money sitting idle.


On May 22 09:39 AM Dan Braem wrote:

> Option Trader - (seekingalpha.com/symbol/b) or (seekingalpha.com/symbol/c).
>
>
> I hate share buybacks - that is why I am down on Microsoft. By definition,
> buybacks destroy the capital structure and it gives cash to short-term
> holders. Long-term shareholders receive nothing.
>
> To be more specific, I would say (seekingalpha.com/symbol/b).
> In an era where almost every company is capital constrained, those
> with capital could make a lot of money. I think in the last two months
> you have seen many opportunities. Reminds me of when Berkshire bought
> its initial stake in GEICO - where GEICO was struggling but the additional
> capital made it worth more. You are seeing the same thing now with
> many insurers or banks.

May 24 02:02 PM

[mbogosi:]

Stock price today is a reflection of expected future earnings. Google has developed into a relatively low volatility stock for a reason. Expected future cashflows are becoming harder to materialize into a premium when concurrently current operating free cash flows are becoming more concrete.

Moving forward however, Google has shown us many times it's ability to reinvent itself be bringing new an innovative updates to existing services they provide their users.

I agree, they are spending quite a bit on losing projects. This is however a price that many companies pay in their growth phase when approaching the end of a product life cycle. However, the debt structure of Google favors their ability jump on opportunities when they arise.

I look forward to what's in store for them!


On May 23 05:29 AM Nettligent wrote:

> Apple, Cisco, Google, and HQ are great companies with strong management,
> little or no debt, clean balance sheet, responsible company, excellent
> products and command a huge market share.
> This is my dilemma and could not get answer.
> Market expects these companies to grow and grow. It is reasonable
> expectation when these companies are young. They have done a great
> job.
> How can these companies beat Earning quarter after quarter, year
> after year, at their size for the next 5 years?.Impossible tasks.

May 26 06:40 PM

[Dan Braem:]

Why would someone invest in a textile mill company that manages an equity portfolio? Unfortunately, using your logic would have cost any early B.H. shareholders (post Warren Buffett) millions of dollars.

Sometimes companies with capital can get deals that other companies and other individuals cannot. I would refer to the Berkshire Hathaway deals with Goldman and G.E.

In general, I agree with you though. If a company isn't a great allocator of capital, then return any excess to shareholders. Simple. I would be an investor in Microsoft if they shared this philosophy.


On May 24 02:02 PM Option Trader wrote:

> Going back to basics, why would i want to invest in a tech company
> managing an equities portfolio? I can do that myself and make a portfolio
> which is best suited for me rather than being forced to invest in
> a predefined mix. GEICO was a different case with an asset managment
> mandate and all. A tech company has no justification to channel cash
> into equities save for some strategic purposes. Spare cash, IMHO,
> should be ploghed back to ramp up R&D or just given out as dividends.
> A warchest is good thing but spare cash to the tune of ~1.5 times
> total liabilities is just money sitting idle.

May 26 09:43 PM

[Option Trader:]

Berkshire Hathway is one of those delightful exceptions to the rule. Agreed, in hindsight, it seems like a good investment, but the point still remains that an investment is in a philospohy of working and not in the name of a company. And the Goldman and GE deals are with BH but a totally different BH from the early one. It is a true investment company now.
Betting on companies moving into non traditional areas is a deceptively high risk play, but a valid strategy nevertheless.


On May 26 09:43 PM Dan Braem wrote:

> Why would someone invest in a textile mill company that manages an
> equity portfolio? Unfortunately, using your logic would have cost
> any early B.H. shareholders (post Warren Buffett) millions of dollars.
>
>
> Sometimes companies with capital can get deals that other companies
> and other individuals cannot. I would refer to the Berkshire Hathaway
> deals with Goldman and G.E.
>
> In general, I agree with you though. If a company isn't a great allocator
> of capital, then return any excess to shareholders. Simple. I would
> be an investor in Microsoft if they shared this philosophy.

May 29 04:51 AM

[The Hammer:]

"I hate share buybacks - that is why I am down on Microsoft. By definition, buybacks destroy the capital structure and it gives cash to short-term holders. Long-term shareholders receive nothing. "

You have it backwards. Long term shareholders benefit handsomely from buybacks if shares are bought back at great valuations not the 40-60 times earnings buybacks ko or wmt did. Thus leading to meaningful declines in share count of time which increase long term stock ownership. Another thing: buybacks only benefit the shareholder if cos execusitives and employees are not feeding at the trough of stock option dilution. many of these buybacks for tech cos are just a coverup for these outrageous transfer of stock ownership to employees from shareholders. Stock options were the worse form of compensation ever invented.

May 29 09:11 AM