Identifying 8 Predictable Cash Machines

by: Alex Rasmussen

The average investor is becoming more and more acquainted with the power of free cash flow. If you look solely at earnings, you run the risk of buying into the next Enron. In addition to this, while earnings get the spotlight, free cash flow is often under reported. When free cash flow inevitably reflects in earnings, the effect on the share price can be phenomenal. At the heart of much of Buffett's wisdom is a key idea: consistency. Over time, consistent and predictable growth in free cash flow will result in capital appreciation, regardless of market sentiment, macro conditions, etc.

I've found 8 companies that have fantastic free cash flow histories and meet these additional criteria:

  • Have a current Cash ROIC of over 10%
  • Have good Balance Sheets
  • Net Profit Margin over 10%
  • Are not in capital intensive industries, or if they do, are exceptional (indicated by Capex/Net Income not being greater than 25%)

Beside each of the companies I have put their average yoy free cash flow growth (over the past 10 years) and a buy price based on my DCF. If they trade at a discount to my buy price, I've just put "good value". Below is a chart so you can get a visual of what consistency looks like.

Danaher (NYSE:DHR) - 15.52% - $50.08

Roper Industries (NYSE:ROP) - 32.45% - Good Value

Ansys (NASDAQ:ANSS) - 37.6% - $60.88

Mednax (NYSE:MD) - 12.3% - Good Value

J2 Global Communications (NASDAQ:JCOM) - 33.17% - Good Value

Portfolio Recovery Associates (PRAA) - 28% - Good Value

World Acceptance (NASDAQ:WRLD) - 16.92% - Good Value

Oracle (NYSE:ORCL) - 16.12% - $26.86

There is no guarantee that these companies will continue into the future as they have in the past, though as investors, we can get comfort in buying the winners instead of hoping for change from the losers.

I am skeptical of some of these companies. Five of the eight require further investigation. Of the above, I would love to own some Oracle. This being said, I want to get really greedy (indicated by my buy price of $26.86) to compensate for the risk of being in competition with IBM. I hadn't done much work on Danaher before but that one is also intriguing. I have been following J2 Global for a while and love it; it is my favourite of the above.

I will track these 8 picks as a concentrated portfolio and periodically update on the performance relative to the S&P 500.

Disclosure: I am long GRVY, MCF.

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