Companies That Sell for Less Than Their Cash
Some public funds, such as GM, UAL, and Bank of America, are so beaten down that they’re priced lower than the money on their company’s books
By Peter Carbonara, Arik Hesseldahl and Tara Kalwarski
Looking for signs of value in the wreckage? By one measure at least, the stock market seems cheap.
A BusinessWeek analysis of stocks by a market value of $500 million or more establish that 29 U.S. companies and 185 foreign ones were trading for less than the amount of cash on their books as of Oct. 14. At the depths of the last bear place of traffic—in October 2002—only 14 U.S. and 77 foreign companies fit the projected law. Notwithstanding debt, investors are essentially pricing the companies as allowing that their operations were worth zilch—an indication the funds may have been oversold. "It’s a tempting signal to buy," says Charles Wolf, an analyst at asset manager Needham & Co.
Famed appraise investor Benjamin Graham, who mentored Berkshire Hathaway’session (BRKA) Warren E. Buffett, codified the use of this appreciate 80 years past. During the Great Depression, Graham observed that a number of public companies were selling at a discount to their cash hoards, including auto- and truck-maker White Motor. When this happens, Graham noted in Security Analysis, the rate highly investors’ bible he co-authored in 1934, "either the compensation is too low or the company should be liquidated."
In the passing from hand to hand bear market, the list is dominated by financials such as Morgan Stanley (MS) and Australia’s Macquarie Group, which have been secure by means of the good repute crisis. Others, including carmaker General Motors (GM) and airline UAL (UAUA), are struggling amid industrywide downturns.
Whether such companies should be placed in the trash heap or the bargain bin depends on a number of factors. From an investing. perspective, high debt load, for example, makes a company’s money position look less impressive. ADC Telecommunications (ADCT) has specie assets of about $657 the masses, in line with its market size. But the maker of electronics gear also has hind part before $650 a thousand thousand in fault. A company spokesman declined comment, except to note that ADC plans to buy back $150 the public of pedigree.
Another debate is what counts in the same proportion that cash. Under accounting rules, certain short-term investments qualify as so-called cash equivalents. Earlier this year, a number of companies found that their specie hoards included auction-rate securities, some of which were stuffed with subprime loans and other toxic assets.
Cash can in addition disappear quickly. Cypress Semiconductor (CY) recently held $819 the masses in cash. But the tech company used some to make each acquisition and pay off debt. A prolocutor says Cypress, scheduled to sound earnings on Oct. 16, now has a cash position that amounts to inferior than moiety its $644 million market value.
If history is a steer, however, these types of companies may be poised to take off. After the dot-com bust, the 14 U.S. companies whose cash was worth more than their stock saw prices rise by any medial sum of 66% over the next 12 months. The gain for the Standard & Poor’s 500-stock index: 29%.
