MCO, MSFT & SGEN - Outperforming, Cash-Rich Stocks

Financial analysts and reports toss around the term 'bubble' too often to count, especially when markets see a rally like that over the last few trading days. But should investors be concerned stocks are inflated right now? As Yahoo! Finance reports, The New Yorker's James Surowiecki doesn't think so. He sees healthy corporate profits as a sign that the market's current valuation is relatively accurate, especially when foreign earnings of US corporations are taken into account. Simply put, earnings are at record levels.

With that in mind, we searched for companies that have exceptional levels of cash on hand. We took a universe of stocks and looked at balance sheets for cash holdings that exceed more than four quarters of average operating expenses. With such large cash cushions, the companies in question could run operations (on average) for more than four quarters without earning any substantial profits.

With the results from that screen, we then looked for those that have outperformed over the last quarter, with over 20% return.

Next, we looked for positive trends in accounts receivable, comparing growth in revenue to growth in accounts receivable. Since accounts receivable is the portion of revenue not yet received, and there is no guarantee the money will ever be received, the smaller the portion of revenue made up of receivables the healthier the company's total revenue.

We screened for companies seeing faster growth in revenue than accounts receivable year-over-year, as well as accounts receivable comprising a smaller portion of current assets over the same time period.

We were left with three companies on our list.

The List

These stocks have not only done well in the rally, but may have enough resources to protect themselves if the bubble fears come true. Do you think these stocks will continue to outperform? Use the list below as a starting point for your own analysis.

 

1. Moody's Corp. (MCO): Provides credit ratings and related research, data, and analytical tools; risk management software; and quantitative credit risk measures, credit portfolio management solutions, and training services in the United States, Europe, the Middle East, and Africa.

  • Market cap at $15.07B, most recent closing price at $67.60
  • Performance (quarter): 41.07%
  • Average quarterly operating expense over the last five quarters at $420.86M, vs. most recent cash and short term investments at $1769.6M, implies a Cash / Avg. Operating Expense ratio at 4.2.
  • Revenue grew by 13.14% during the most recent quarter ($731.8M vs. $646.8M y/y). Accounts receivable grew by 8.15% during the same time period ($637.2M vs. $589.2M y/y). Receivables, as a percentage of current assets, decreased from 38.6% to 25.28% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).
  • MCO has recorded great gains over the last month, when compared to its closest competitors. The stock returned 11.42% since 4/30/13, better than Fidelity National Information Services, Inc. (FIS) but slightly below Dun & Bradstreet Corp. (DNB), which returned 8.87% and 12.37%, respectively, during the same time period.

Based on conventional valuation ratios, MCO looks relatively cheap when compared to industry peers. The stock's PEG ratio stands at 1.41, while its Price/Cash ratio stands at 8.51. Even on a Price to Free Cash Flow basis the stock looks cheap, with a ratio of 19.48, compared to Fidelity National Information Services, Inc. (P/FCF ratio at 26.58) and again close to DNB (P/FCF ratio at 17.94).

2. Microsoft Corporation (MSFT): Develops, licenses, and supports a range of software products and services for various computing devices worldwide.
  • Market cap at $292.54B, most recent closing price at $35.03
  • Performance (quarter): 26.87%
  • Average quarterly operating expense over the last five quarters at $13262.8M, vs. most recent cash and short term investments at $74483M, implies a Cash / Avg. Operating Expense ratio at 5.62.
  • Revenue grew by 17.71% during the most recent quarter ($20,489M vs. $17,407M y/y). Accounts receivable grew by 9.4% during the same time period ($11,991M vs. $10,961M y/y). Receivables, as a percentage of current assets, decreased from 14.26% to 12.82% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).
  • MSFT has recorded strong gains over the last month, when compared to its closest competitors. The stock returned 6.57% since 4/30/13, better than Oracle Corporation (ORCL) and Google, Inc. (GOOG), which returned 4.76% and 5.60% during the same holding period.

MSFT has a lower than average projected earnings growth rate over the next 5 years (8.53%). This is significantly below the analyst projections for Apple Inc. ( AAPL) (projected EPS growth over next 5 years at 20.88%), SAP AG (projected EPS growth over next 5 years at 12.83%), but still close to Cisco Systems, Inc. ( CSCO) (projected EPS growth over next 5 years at 8.33%).

3. Seattle Genetics Inc. (SGEN): Focuses on the development and commercialization of monoclonal antibody-based therapies for the treatment of cancer and autoimmune diseases in the United States.
  • Market cap at $4.33B, most recent closing price at $35.68
  • Performance (quarter): 26.79%
  • Average quarterly operating expense over the last five quarters at $68.36M, vs. most recent cash and short term investments at $344.13M, implies a Cash / Avg. Operating Expense ratio at 5.03.
  • Revenue grew by 18.84% during the most recent quarter ($57.33M vs. $48.24M y/y). Accounts receivable grew by -20.1% during the same time period ($45.88M vs. $57.42M y/y). Receivables, as a percentage of current assets, decreased from 14.82% to 10.65% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).
  • SGEN has returned -3.44% since 4/30/13, and is one of the worst performing stocks in its industry. The stock is falling behind companies like Immunogen Inc. (IMGN) and Teva Pharmaceutical Industries Ltd. (TEVA), which returned 14.97% and 2.24%, respectively, during the same period.

The company has reported strong earnings growth over the last year, with EPS growing by 66.05%, higher than companies like IMGN (EPS growth over the last year at -12.89%), Celgene Corporation ( CELG) (EPS growth over the last year at 15.97%) and Biogen Idec Inc. ( BIIB) (EPS growth over the last year at 14.31%).

*Written by Kapitall's Emily Smykal. Accounting data sourced from Google Finance, all other data sourced from Finviz.

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