Balance-Sheet Powerhouses Deserve Our Admiration: John Dorfman

Bill Gates, Warren Buffett, the multimillionaire on the hill in your hometown: They are all figures of admiration.

Accumulating great wealth often speaks to a person’s persistence and career-management skill. Yet when a company achieves the same feat, it often goes unnoticed.

I like to spotlight such companies from time to time by compiling a list of U.S. companies that are balance-sheet powerhouses.

To make the list, a company must have:

-- Stock-market value of $1 billion or more;

-- Cash or near-cash of $300 million or more;

-- Long-term debt of $200 million or less;

-- Total debt no more than 10 percent of stockholders’ equity;

-- A current ratio (current assets divided by current liabilities) of 2.0 or more;

-- Fully diluted earnings of at least 10 cents a share in the latest fiscal year.

This year, 28 companies made my Balance Sheet Powerhouse list. That’s pretty good considering the economy is recovering from a dreadful recession. In 2006, 42 companies passed these tests while 38 were on the list in 2005.

Strength in Numbers

I compiled this list for six years from 2001 through 2006, and then abandoned it for a while. I am bringing it back because I believe investors pay too much attention to short-term fluctuations in earnings, and not enough attention to longer-term qualities such as balance-sheet strength.

To make this list is an honor. Yet it’s not equivalent to a stock recommendation.

That’s because companies that make the list are often so outstanding their excellence is already recognized with a high stock price. To make money in the stock market, you need to find either a great company at a good price, or a good company at a great price.

A few companies have graced the Balance Sheet Powerhouse list several times.

Forest Laboratories Inc. (FRX) is the only company that has made the list all seven years I have compiled it. The drug company has been an uninspired investment for the past decade. It trades at about $32, little changed from its level 10 years ago.

Going forward, I believe New York-based Forest Labs will be an excellent investment. The drugmaker is debt free and its shares trade at seven times earnings. The company has just enhanced its pipeline by agreeing to acquire Clinical Data Inc. of Newton Massachusetts for $1.2 billion.

Next Best-Seller

That will give Forest Labs the rights to Clinical Data’s new antidepressant Viibryd, which was approved by the U.S. Food and Drug Administration in January. Viibryd could be a possible successor to Lexapro, which loses patent protection in 2012. Lexapro has been Forest’s best-selling drug, accounting for more than half of sales.

Forest Labs was formerly tied with Microsoft Corp. at six appearances on this list. Microsoft missed the debt-to-equity ratio cutoff this year. Its debt is about 20 percent of equity.

San Diego-based Qualcomm Inc. (QCOM), the communications-technology company, is back for a sixth appearance. One of its latest ventures involves interactive graphics, a project it dubs augmented reality. One example is a virtual-reality basketball game in which players can move their mobile phones around to shoot from various angles.

EBay Inc., which had previously tied with Qualcomm at five, missed the cut this time, tripping on the same hurdle as Microsoft. (Ebay’s debt is 12 percent of equity.)

Not Good Enough

Both Microsoft and EBay still have strong balance sheets in my opinion, just not quite excellent enough to meet the Powerhouse criteria.

Google Inc. (GOOG), the largest company on this year’s list in terms of market value, has made the list each year it was eligible. Google went public in 2004.

In addition to Forest Labs, I think AVX Corp. (AVX) looks attractive as a purchase. Based in Fountain Inn, South Carolina, AVX makes components that store and regulate electrical energy.

AVX shares trade at 12 times earnings and 1.4 times book value (corporate net worth per share). Those are attractive valuations, especially for a company that stayed profitable during the recent recession. Analysts expect it to post a 67 percent earnings increase this fiscal year.

I also like Dallas-based Texas Instruments Inc. (TXN), which is making the roster for the first time this year, and which I recommended in a column last month. However, I consider it less of a bargain than Forest Labs and AVX.

Below is the list of 28 stocks that are Balance Sheet Powerhouses.


Seven times honored: Forest Laboratories
Six times: Qualcomm
Four times: AVX, Gentex Corp.
Three times: Bed Bath & Beyond Inc., Google
Two times: American Eagle Outfitters Inc., Dolby
Laboratories Inc.
New to the list: Autodesk Inc., Celgene Corp., Cognizant
Technology Solutions Corp., Cree Inc., Edwards Lifesciences
Corp., Expeditors International of Washington Inc., Genzyme
Corp., Hansen Natural Corp., J. Crew Group Inc., Juniper
Networks Inc., Mastercard Inc., Micros Systems Inc., Novell
Inc., Pharmaceutical Product Development Inc., Polycom Inc.,
Quanta Services Inc., ResMed Inc., Simpson Manufacturing Co.,
Teradata Corp., and Texas Instruments.

Disclosure note: I have no long or short positions in the stocks discussed in this week’s column, personally or for clients.

(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)

To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com.

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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