By Daniel Carver
Using Finviz.com’s stock screening tool, I selected for S&P 500 companies with unusually high current ratios (> 5). This can signal a significant amount of cash and cash equivalents on the balance sheet, along with highly liquid short-term investments. I want to examine what is happening with these companies and determine whether or not these exaggerated current ratios are justifiable.
In the past, maintaining excess cash reserves was considered bad form, even indicative of poor management. After all, there is a time value to money and it’s just good judgment to put that money to work in some fashion, right? Well…maybe. We are in different times now. Credit markets are tight. Capital doesn’t flow with the alacrity it once flowed. Many companies are, no doubt, concerned that opportunities might pass them by in the absence cash available to execute a strategy while others might just be hedging against tough times ahead.
So let’s look at 5 of these companies. We’ll delve into the financials because they’ll show us the money. Hopefully we can gather some insight into what’s happening from the financials and from the news front that may explain management’s logic for maintaining these significant cash surpluses.
Analog Devices Inc. (ADI), a mid cap in the technology sector, is trading at about $33.23. ADI’s current ratio is 8.36. In just 2 years this company has increased its CCE by 119.64% and the balance sheet for the year ending October 29, 2011, reflects just north $1.4 billion on hand. ADI concurrently increased highly liquid, short term investments by almost 86%, more than $1 billion. The income statement shows that operating expenses, including research and development expenditures, were virtually flat in the same time interval.
After researching online and drawing a blank on any potential acquisitions or hints of acquisitions, I am left with the conclusion that ADI is hedging against weak demand for its products. A recent Bloomberg article discloses that ADI management is, in fact, expecting demand to weaken. My advice to ADI’s management would be to consider increasing short term investments and reducing CCE. Of course, they could also consider increasing shareholder’s dividend payout. Given the cyclical nature of their business, even in good times, I understand management’s mindset. They should be a bit smarter about it in my opinion.
Google Inc. (GOOG), a mega cap in the technology sector, is trading at about $596.43. GOOG’s current ratio is 5.63. Since the year ending December 31, 2008, Google has increased its CCE position by 57.45%, from $8.66 billion to $13.63 billion at December 31, 2010’s year end. During the same period, Google grew its short term investments from $7.19 billion to $21.35, a staggering increase of 196.91%.
The income statement shows that revenue costs only increased 20.83% for the period. Really nothing in the wind here either. I don't find any concrete reason for Google to be sitting on so much cash. I will say that its strategy with short term investments is a good example for ADI to follow. I have some thoughts on what Google should do with all that cash. Given Google’s existing stake in the Chinese market, plus Yahoo’s 40% stake in Alibaba Group Holding Ltd. (OTC:ALBCF), I think Google should throw Jack Ma a curve and buy Yahoo's (YHOO) Asian assets. Such a move could cement Google’s position in the Chinese market.
Scripps Networks Interactive, Inc. (SNI), a mid cap in the services sector, is trading at about $39.64. SNI’s current ratio is 5.84. In just 2 years this company has increased its CCE by 5,416% and the balance sheet for the year ending December 31st, 2010 reflects just south of $550 million on hand. Simultaneously, SNI allowed short term investments to fall from $2.7 million all the way to zero.
The income statement shows that operating expenses dropped 46% in the same time interval. There is nothing in recent headlines to suggest any reason for SNI to be parked on so much cash. In fact, the earnings outlook is bright. Dare I suggest this CCE surplus represents nothing more than a blatant example of fiduciary irresponsibility?
Tiffany & Co. (TIF), a mid cap in the services sector, is trading at about $66.15. TIF’s current ratio is 5.31. In just 2 years this company has increased its cash by 324.81% and the balance sheet for the year ending January 31st, 2011 reflects just south of $681.6 million on hand. Simultaneously, Tiffany grew short term investments from $0.0 to $59.28 million. The income statement shows that operating expenses were virtually flat in the same time interval. Tiffany and other luxury stocks have to be concerned about earnings and growth prospects in this economy. I think Tiffany’s concerns are reflected in the cash position it has undertaken.
Xilinx Inc. (XLNX), a mid cap in the technology sector, is trading at about $32.51. The current ratio for Xilinx is 6.57. In the past 2 years this company has increased its CCE by a modest 14.67% and the balance sheet for the year ending April 2nd, 2011 reflects just north $1.22 billion on hand. XLNX however increased its short term investment position by almost 172%, to slightly more than $704 million.
The income statement shows that operating expenses, including research and development expenditures, were essentially flat in the same time interval. Year-over-year quarterly revenue and earnings growth were down -10.40 and -26.10 respectively. There is nothing noteworthy in the news to suggest anything afoot.
The business is cyclical, and I have to accept that this is simply a hedge against difficult times. Kudos to XLNX management for growing short term investments as opposed to CCE and I would encourage the shift of even more cash into short term. Alternatively, I have no doubt that shareholder’s would welcome a dividend increase.
After reviewing these 5 companies, I have come to the conclusion that two of them are clueless, two are afraid, and one is both.