One of the fun things about writing about stocks for a living is the library of content you can draw upon for inspiration. Back in June 2020, we were deep in the pandemic, so I wrote a piece about cash-rich stocks to buy for peace of mind.
Fast forward nearly four years. Its cash remains an essential component of the balance sheet. That’s especially true for companies that have overleveraged their businesses with too much debt coming due and will have to be refinanced at higher interest rates.
Having the free cash flow to pay down debt at any point in a company’s business cycle is critically important. It’s one of the five levers of capital allocation. The others are dividends, share repurchases, acquisitions, and business reinvestment.
“For me, the companies that are cash-rich are those that convert as much free cash flow as possible from net income and have more cash than total debt on their balance sheet. Margins, while important, aren’t as critical as the ability to generate cash. End of story,” I wrote on Jun. 19, 2020.
Most of the 10 stocks have done well over the past 43 months. Therefore, I’m adding three new names to the list from three different sectors.
Skyline Champion (SKY)
Free Cash Flow to Net Income: 92%
Cash and Marketable Securities to Total Debt: 5,641%
Skyline Champion (NYSE:SKY) represents consumer cyclical stocks. It is a Michigan-based producer of factory-built housing — think modular and manufactured homes.
Its brands include Skyline Homes, Champion Home Builders, Genesis Homes, Athens Park Models, and more. In addition to its homebuilding, it operates a retail business with 31 locations selling modular and manufactured housing. Additionally, its Star Fleet Trucking provides transportation services to the modular and manufactured housing industry.
As you can imagine, with higher interest rates, the business has seen a downturn in its revenues and profits. However, given its firm financial footing, it’s got plenty of cash to ride out the downturn.
Interestingly, millennials and baby boomers account for 46% and 26% of manufactured home sales, respectively, with those aged 46-54 accounting for 17% and other age groups accounting for 11%.
Affordability has everything to do with the millennials buying them.
Mueller Industries (MLI)
Free Cash Flow to Net Income: 106%
Cash and Marketable Securities to Total Debt: 3,149%
It seems as though I’ve written about Mueller Industries (NYSE:MLI) a lot lately. Most recently, I included the maker of copper products for the construction industry, among others, in a list of three industrial stocks set for success. I said it was one of the soundest businesses I know. The two figures above illustrate what I’m talking about.
In September 2022, I recommended it in a list of seven small company stocks to own. I even pointed out that although it’s got a fortress-like balance sheet, it has a pension and post-retirement obligations, which bumps up its total debt slightly, but nothing worth worrying about. It’s just nice to know.
On page 24 of its November 2023 presentation, the company points out that “low leverage provides flexibility to execute capital allocation strategies.”
It prioritizes internal reinvestment over every other capital allocation lever. That said, it’s increased its annual dividend for 19 consecutive years, increasing its dividend by 500% over those years.
In 1992, it generated operating income of $29.3 million. In 2022, it was $877.1 million, with 62% of its operating income outside the U.S.
No wonder its stock is up 276% over the past five years.
Progyny (PGNY)
Free Cash Flow to Net Income: 383%
Cash and Marketable Securities to Total Debt: 1896%
Progyny (NYSE:PGNY) seems like a name I’ve written about in the past, but I can’t seem to find any of my articles about the fertility business. Fortunately, my InvestorPlace colleague Alex Sirois recently recommended the mid-cap stock.
Sirois highlighted the business opportunity, pointing out that the average woman in America has 1.6 children. Further, the replacement rate is 2.1., which means the population will grow older and shrink, reducing the country’s economic growth and productivity.
One of the services it provides to companies is end-to-end family building and women’s reproductive health benefit packages for their employees. With an incredibly competitive workforce here in America, benefits like these can be the difference between recruiting top talent and losing them.
Progyny expects to generate at least $1.09 billion in revenue in 2023, with adjusted EBITDA (earnings before interest, depreciation and amortization) of $186 million. In 2024, it expects to have 460 corporate clients that provide their end-to-end benefit packages to 6.7 million people. That’s up from 370 clients and 5.4 million in 2023.
The more its clients’ employees utilize these specialty benefits, the more revenue it makes. It also gets paid based on the number of employees covered under the benefits. That’s a PEPM fee (per employee, per month fee). It accounts for 1% of Progyny’s annual revenue.
For the nine months ended Sept. 30, 2023, its cash from operations increased by 423% over 2022. It explains the high free cash flow to net income ratio from above.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.