by Richard Moroney, editor Dow Theory Forecasts
In addition to the better-known price/earnings ratio, we like to use
price/operating cash ?ow and price/free cash ?ow to value stocks
relative to their cash-generating ability.
We screened for
stocks that have grown operating cash flow and also look cheap relative
to both operating cash ?ow and free cash ?ow. Three free cash flow
favorites are
Agilent Technologies (
A),
Google (
GOOG) and
Oracle (
ORCL).
Agilent Technologies, a maker of measurement and testing equipment,
illustrates the virtues of cash ?ow. For eight consecutive quarters, it
has grown both operating cash ?ow and free cash ? ow at least 35%.
Some
of that cash went toward the repayment of long-term debt, but much of
it remained on the balance sheet, lifting net cash per share to $3.82
from a negative $1.17 two years ago.
The con?uence of surging
operating momentum and a revitalized balance sheet encouraged management
earlier this month to initiate a quarterly dividend of $0.10 per share.
Better yet, the stock hasn't kept up with that cash-?ow growth, despite rebounding 49% from its October low.
Shares
trade at 12 times trailing cash provided by operations, a 25% discount
to their ?ve-year average. At 14 times trailing free cash ?ow, the stock
fetches a 29% discount to its peer-group average.
Agilent seems
poised to deliver more growth, with the consensus projecting 15% higher
per-share profits in the January quarter. Revenue growth is likely to
exceed 8% for an eighth consecutive quarter.
Agilent has a
history of managing Wall Street expectations, having topped the
consensus pro?t estimate in each of the last 10 quarters.
Scoring above 50 in all six categories in our quantitative ranking
system and earning an Overall rank of 97, Agilent is a Long-Term Buy.
Google
shares retreated after the company said it earned $9.50 per share in
the December quarter excluding special items, up 9% but $0.99 short of
the consensus estimate.
Revenue increased 25% to $10.58 billion
while cash provided by operations rose 11% to $3.92 billion, marking the
10th straight quarter of growth for both metrics.
The number of
clicks on Google's search ads surged 34% in the quarter, but the
average cost per click — what Google charges advertisers — dipped 8%.