Coverage Ratio Scan: Companies With Debt That Can Survive the Recession ~ market folly

Thursday, February 19, 2009

Coverage Ratio Scan: Companies With Debt That Can Survive the Recession

Wanted to pass along this interesting scan I saw on Seeking Alpha. Basically, it takes the cash flow to debt coverage ratio to show a company's ability to cover total debt with operational cash flow. Thus, the higher the ratio is, the more likely a company can carry its total debt.

They scanned for companies with a ratio of 0.75 or more and cross-referenced it with the S&P500 for a final result of 23 stocks. In no particular order:

  1. Aflac (AFL)
  2. Bard (BCR)
  3. CF Industries (CF)
  4. Coach (COH)
  5. Gap (GPS)
  6. Jacobs Engineering (JEC)
  7. Altria Group (MO)
  8. Occidental Petroleum (OXY)
  9. Robert Half (RHI)
  10. Southwestern Energy (SWN)
  11. Stryker (SYK)
  12. Titanium Metals Corp (TIE)
  13. MEMC Electronic (WFR)
  14. Exxon Mobil (XOM)
  15. Adobe (ADBE)
  16. Amazon (AMZN)
  17. Apollo Group (APOL)
  18. Autodesk (ADSK)
  19. Citrix Systems (CTXS)
  20. Juniper Networks (JNPR)
  21. Microsoft (MSFT)
  22. Qualcomm (QCOM)
  23. Yahoo (YHOO)

A lot of companies on the list are very cash-rich. Companies with large cash stock piles and no debt, like Apple (AAPL), do not make the list because they have no debt to service. So, you could run an additional scan for companies with high cash levels and no significant debt in order to find some more gems. OXY is interesting because we have seen a ton of hedge fund buying in that name over the past few quarters. It is easily one of the most popular oil names among hedge funds. QCOM is another hedge fund favorite and is easily one of the most widely held stocks. Additionally, we know that Carl Icahn and many others have been rabblerousing in YHOO. Lastly, we see that WFR makes the list. David Einhorn has recently been buying this one as he thinks it is cheap (and they have a ton of cash too). The underlying theme here is to find companies that have an abundance of cash in an environment where cash and liquidity is king. And conversely, you could even put on a pairs trade by shorting companies that will have problems servicing their debt due to overleverage or lack of capital. Long deleveraging, short leverage.

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