When cash pile tops market cap
Slowing world economy wiped out US$32t in capitalisation this year
By MICHAEL TSANG AND ALEXIS XYDIAS
STOCKS have fallen so far that 2,267 companies around the globe are offering profits to investors for free. That's eight times as many as at the end of the last bear market, when the shares rose 115 per cent over the next year. Bank of New York Mellon Corp in New York, Danieli SpA in Buttrio, Italy and Seoul-based Namyang Dairy Products hold more cash than the value of their stock and debt as the slowing world economy wiped out US$32 trillion in capitalisation this year. Companies in the MSCI World Index trade for an average US$1.17 per dollar of net assets, the lowest since at least 1995, and 39 per cent sell at a discount to shareholder equity, Bloomberg data shows.
The cash-rich companies allow investors to pay nothing for future earnings streams, providing opportunities to buyers concerned about deflation, according to Jean-Marie Eveillard, whose US$16 billion First Eagle Global Fund has beaten 98 per cent of competitors this year. Microsoft and Novo Nordisk A/S, which generate the most money compared with debt, can expand even if lower consumer demand erodes profits.
'Cash is king, not necessarily for the investor but for corporations,' Mr Eveillard said last week. His fund holds both Microsoft and Namyang Dairy. 'It's useful to sit on a ton of cash, No 1 to survive, as opposed to going bankrupt, and No 2 to seize opportunities either to make acquisitions cheaply or to squeeze competitors.'
BNY Mellon is among 50 companies with a market capitalisation greater than US$1 billion that hold more cash than the value of their stock and debt, out of 2,267 overall, data compiled by Bloomberg show. 'Everywhere I look, I see cash,' said James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which manages US$220 billion. 'When greed overcomes fear again, value is going to wag the dog.'
Stocks plunged this year after almost US$1 trillion in bank losses and writedowns froze credit markets and pushed the US, Europe and Japan into the first simultaneous recessions since World War II. The 38 per cent drop in the Standard & Poor's 500 Index is the steepest since 1937, while the MSCI World's 44 per cent plummet is the biggest since the gauge started in 1970.
The slump left prices in the global measure at 1.17 times companies' so-called book value, or assets minus liabilities, on Nov 20, the lowest on record. The MSCI World climbed 5.5 per cent in New York, while the S&P 500 rose 3.8 per cent after US President-elect Barack Obama pledged the biggest investment in the nation's infrastructure since the 1950s to stimulate the economy.
Stagnating growth is heightening the risk of deflation. In the US, consumer prices plunged one per cent in October, the biggest drop since records began in 1947. They may slow next year by the most since 1983, squeezing earnings, according to the International Monetary Fund. Businesses with reserves will be cushioned from insolvency and may even benefit from deflation because buying power and the value of dividends increase as prices retreat, said Arlene Rockefeller, chief investment officer for global equities at State Street Global Advisors, which oversees US$1.7 trillion. 'You want stocks with good cash flow and are self-funding,' Mr Rockefeller said. 'This is an opportunity for companies that are large and that do not have a lot of debt to go out and acquire other companies to gain market share.'
Generating cash
The firm's SSgA Disciplined Equity Fund held shares of BNY Mellon, the world's largest custodian of financial assets. The bank had US$24 billion in so-called negative enterprise value, or the amount of cash that exceeds the value of its shares and debt. The stock has climbed 26 per cent since Nov 20. Danieli, Italy's biggest maker of equipment for the steel industry, has US$1.49 billion in cash, or almost 40 per cent more than the combined value of its shares and debt after a 71 per cent stock plunge this year.
Just 276 companies had cash that exceeded the value of their stock and debt when the S&P 500 bottomed in 2002. Those shares posted a median total return of 115 per cent over the next 12 months, according to data compiled by Bloomberg. That's more than triple the return for the S&P 500 during the same span. Of the 50 largest companies in the Dow Jones Stoxx 600 Index of European companies, Novo Nordisk, the world's biggest insulin maker, is one of two whose cash exceeds debt by four times.
Novo Nordisk chief financial officer Jesper Brandgaard said on Oct 30 that the Bagsvaerd, Denmark-based company is earmarking as much as US$2 billion for takeovers in the next 12 months as the financial crisis forces biotechnology companies to seek buyers. The company has US$1.35 billion and generated US$1.83 billion in free cash flow in the first three quarters of 2008.
'The ones that are going to win are those that can generate cash,' said Horacio Valeiras, who oversees US$11.2 billion as chief investment officer at Nicholas Applegate Capital Management in San Diego. His Nicholas Applegate International Growth Fund bought shares of Novo in the third quarter. The stock has since gained 11 per cent, while the Stoxx 600 slumped 21 per cent.
Mr Eveillard at First Eagle increased his fund's position in Microsoft by 83 per cent to 8.16 million shares last quarter. Microsoft is one of only two in the S&P 500 with cash and marketable securities worth more than US$20 billion and less than US$2 billion in debt. Apple Inc is the other. Microsoft and Apple outperformed the MSCI World since its low on Nov 20, posting advances of 20 per cent and 24 per cent, respectively.
Mr Eveillard's fund is also the biggest overseas shareholder of Namyang Dairy, which has no debt and US$270 million in cash. The cash pile is 44 per cent higher than the value of its shares. Reserves at the company, one of South Korea's biggest dairies, account for 65 per cent of its US$418 million in so-called tangible book value, a measure of shareholder equity that excludes assets that can't be sold in liquidation.
'Cash provides a break against a potential catastrophe,' said Mr Eveillard. 'At the end of the day, cash is still worth 100 cents on the dollar.' That helps explain why investors have rushed to Treasuries this year. Yields on three-month Treasury bills fell to 0.01 per cent last week as investors paid a premium for the safest, most liquid assets. The level was the lowest since 1940, according to monthly figures compiled by the Federal Reserve.
One reason so many cash-rich companies are available now is because leveraged buyout firms such as Henry Kravis's KKR & Co and Blackstone Group have been hamstrung by the credit crunch, according to Tom Rozycki at Principal Global Investors. Private-equity deals fell more than 70 per cent from last year's record US$727 billion as banks stopped funding takeovers. The US$43 billion buyout of energy producer TXU Corp by KKR and TPG Inc in 2007 was the biggest ever. 'You don't wish for this kind of environment, but it's nice to have private equity out of the way so we can get some of these bargains too,' said Mr Rozycki. 'For the longest time, a lot of these companies had premiums in them because people were pointing around at who's going to be acquired next.'
Many stocks are cheap because investors doubt their reported asset values and ability to generate enough earnings to survive, said Sergi Martin, who oversees US$9 billion as chief executive at Credit Andorra's Credit Invest asset management unit in Andorra La Vella, Andorra. 'You have to screen very selectively for companies that will survive, and not for future corpses,' Mr Martin said. 'There will be more bankruptcies, and where valuations are absurd and there is nothing wrong with the company, time will correct that.' - Bloomberg
Slowing world economy wiped out US$32t in capitalisation this year
By MICHAEL TSANG AND ALEXIS XYDIAS
STOCKS have fallen so far that 2,267 companies around the globe are offering profits to investors for free. That's eight times as many as at the end of the last bear market, when the shares rose 115 per cent over the next year. Bank of New York Mellon Corp in New York, Danieli SpA in Buttrio, Italy and Seoul-based Namyang Dairy Products hold more cash than the value of their stock and debt as the slowing world economy wiped out US$32 trillion in capitalisation this year. Companies in the MSCI World Index trade for an average US$1.17 per dollar of net assets, the lowest since at least 1995, and 39 per cent sell at a discount to shareholder equity, Bloomberg data shows.
The cash-rich companies allow investors to pay nothing for future earnings streams, providing opportunities to buyers concerned about deflation, according to Jean-Marie Eveillard, whose US$16 billion First Eagle Global Fund has beaten 98 per cent of competitors this year. Microsoft and Novo Nordisk A/S, which generate the most money compared with debt, can expand even if lower consumer demand erodes profits.
'Cash is king, not necessarily for the investor but for corporations,' Mr Eveillard said last week. His fund holds both Microsoft and Namyang Dairy. 'It's useful to sit on a ton of cash, No 1 to survive, as opposed to going bankrupt, and No 2 to seize opportunities either to make acquisitions cheaply or to squeeze competitors.'
BNY Mellon is among 50 companies with a market capitalisation greater than US$1 billion that hold more cash than the value of their stock and debt, out of 2,267 overall, data compiled by Bloomberg show. 'Everywhere I look, I see cash,' said James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which manages US$220 billion. 'When greed overcomes fear again, value is going to wag the dog.'
Stocks plunged this year after almost US$1 trillion in bank losses and writedowns froze credit markets and pushed the US, Europe and Japan into the first simultaneous recessions since World War II. The 38 per cent drop in the Standard & Poor's 500 Index is the steepest since 1937, while the MSCI World's 44 per cent plummet is the biggest since the gauge started in 1970.
The slump left prices in the global measure at 1.17 times companies' so-called book value, or assets minus liabilities, on Nov 20, the lowest on record. The MSCI World climbed 5.5 per cent in New York, while the S&P 500 rose 3.8 per cent after US President-elect Barack Obama pledged the biggest investment in the nation's infrastructure since the 1950s to stimulate the economy.
Stagnating growth is heightening the risk of deflation. In the US, consumer prices plunged one per cent in October, the biggest drop since records began in 1947. They may slow next year by the most since 1983, squeezing earnings, according to the International Monetary Fund. Businesses with reserves will be cushioned from insolvency and may even benefit from deflation because buying power and the value of dividends increase as prices retreat, said Arlene Rockefeller, chief investment officer for global equities at State Street Global Advisors, which oversees US$1.7 trillion. 'You want stocks with good cash flow and are self-funding,' Mr Rockefeller said. 'This is an opportunity for companies that are large and that do not have a lot of debt to go out and acquire other companies to gain market share.'
Generating cash
The firm's SSgA Disciplined Equity Fund held shares of BNY Mellon, the world's largest custodian of financial assets. The bank had US$24 billion in so-called negative enterprise value, or the amount of cash that exceeds the value of its shares and debt. The stock has climbed 26 per cent since Nov 20. Danieli, Italy's biggest maker of equipment for the steel industry, has US$1.49 billion in cash, or almost 40 per cent more than the combined value of its shares and debt after a 71 per cent stock plunge this year.
Just 276 companies had cash that exceeded the value of their stock and debt when the S&P 500 bottomed in 2002. Those shares posted a median total return of 115 per cent over the next 12 months, according to data compiled by Bloomberg. That's more than triple the return for the S&P 500 during the same span. Of the 50 largest companies in the Dow Jones Stoxx 600 Index of European companies, Novo Nordisk, the world's biggest insulin maker, is one of two whose cash exceeds debt by four times.
Novo Nordisk chief financial officer Jesper Brandgaard said on Oct 30 that the Bagsvaerd, Denmark-based company is earmarking as much as US$2 billion for takeovers in the next 12 months as the financial crisis forces biotechnology companies to seek buyers. The company has US$1.35 billion and generated US$1.83 billion in free cash flow in the first three quarters of 2008.
'The ones that are going to win are those that can generate cash,' said Horacio Valeiras, who oversees US$11.2 billion as chief investment officer at Nicholas Applegate Capital Management in San Diego. His Nicholas Applegate International Growth Fund bought shares of Novo in the third quarter. The stock has since gained 11 per cent, while the Stoxx 600 slumped 21 per cent.
Mr Eveillard at First Eagle increased his fund's position in Microsoft by 83 per cent to 8.16 million shares last quarter. Microsoft is one of only two in the S&P 500 with cash and marketable securities worth more than US$20 billion and less than US$2 billion in debt. Apple Inc is the other. Microsoft and Apple outperformed the MSCI World since its low on Nov 20, posting advances of 20 per cent and 24 per cent, respectively.
Mr Eveillard's fund is also the biggest overseas shareholder of Namyang Dairy, which has no debt and US$270 million in cash. The cash pile is 44 per cent higher than the value of its shares. Reserves at the company, one of South Korea's biggest dairies, account for 65 per cent of its US$418 million in so-called tangible book value, a measure of shareholder equity that excludes assets that can't be sold in liquidation.
'Cash provides a break against a potential catastrophe,' said Mr Eveillard. 'At the end of the day, cash is still worth 100 cents on the dollar.' That helps explain why investors have rushed to Treasuries this year. Yields on three-month Treasury bills fell to 0.01 per cent last week as investors paid a premium for the safest, most liquid assets. The level was the lowest since 1940, according to monthly figures compiled by the Federal Reserve.
One reason so many cash-rich companies are available now is because leveraged buyout firms such as Henry Kravis's KKR & Co and Blackstone Group have been hamstrung by the credit crunch, according to Tom Rozycki at Principal Global Investors. Private-equity deals fell more than 70 per cent from last year's record US$727 billion as banks stopped funding takeovers. The US$43 billion buyout of energy producer TXU Corp by KKR and TPG Inc in 2007 was the biggest ever. 'You don't wish for this kind of environment, but it's nice to have private equity out of the way so we can get some of these bargains too,' said Mr Rozycki. 'For the longest time, a lot of these companies had premiums in them because people were pointing around at who's going to be acquired next.'
Many stocks are cheap because investors doubt their reported asset values and ability to generate enough earnings to survive, said Sergi Martin, who oversees US$9 billion as chief executive at Credit Andorra's Credit Invest asset management unit in Andorra La Vella, Andorra. 'You have to screen very selectively for companies that will survive, and not for future corpses,' Mr Martin said. 'There will be more bankruptcies, and where valuations are absurd and there is nothing wrong with the company, time will correct that.' - Bloomberg
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