Rules of the Game: Final Word on Free Cash Flow

 | Dec 07, 2012 | 11:30 AM EST  | Comments
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I'll wrap up this week's look at large-cap cash cows today. As I noted in previous columns, free cash flow per share is a good way of measuring a company's ability to finance projects without debt.

I'm focusing on large-cap names because I like the liquidity and price stability these stocks can frequently offer. They tend not to show the explosive earnings growth that small-caps exhibit -- or the accompanying huge price rallies. They offer better dividend payouts, however, and potentially less volatility than thinly traded small-caps.

I previously singled out Visa (V), as well as some of the medical-sector names boasting strong and growing free cash flow per share. Today, I'll put the magnifying glass on a tech and a telecom. In the interest of not rehashing the painfully obvious, I'll skip any analysis of the world's most-examined stock -- Apple (AAPL) -- which falls under the category of large-cap cash cow. 

Moving right along, another cash-rich big tech is Oracle (ORCL), which made news this week as it joined the stampede to pay out dividends before the year ends. The company grew free cash flow per share in the past eight years -- an outstanding record.  Other fundamental metrics don't necessarily suggest earth-shaking price gains ahead, but there is reason to expect earnings stability. Analysts have pegged income at $2.65 per share for fiscal 2013, a year-over-year gain of 8%. In 2014, earnings are expected to come in at $2.91 a share, a gain of 10%. In a smaller stock, particularly one that has shown big growth in prior years, this level of earnings increase would be unremarkable. But Oracle's market cap is north of $154 billion, and the company long ago established dominance of its database, middleware and enterprise application business. So the expected levels of earnings increases are not so shabby.

Oracle reports its fiscal second quarter on Dec. 18 before the open. It's expected to deliver net income of $0.61 per share on revenue of $9.03 billion. Those would be year-over-year gains.

The chart shows a stock that continues to consolidate below its April 2011 multiyear high of $36.05. It is currently trading above key moving averages, and below its intermediate high of $33.39, from mid-September. Though it moves more than 21 million shares per day, Oracle is somewhat volatile, with a beta of 1.14.

Also registering on my free cash flow screen was Qualcomm (QCOM). Like Oracle, this is a widely held large-cap stock has a fairly high beta, 1.13 in this case.  After dipping in 2010, free cash flow per grew in each of the past two years, registering at $2.72 per share most recently.

The earnings picture for the maker of wireless telecom chips is also better than Oracle's. Analysts see earnings growing at a rate of 16% in fiscal 2013, to $4.31 per share. In 2014, that's seen rising another 11%, to $4.76 per share.

Qualcomm is consolidating below its 52-week high from April. However, it is trading above its 50- and 200-day averages. It's in a technical buy zone at the moment, but use caution.  Because Qualcomm tends to trade in a volatile fashion, you have to consider whether it is prudent to sell or hold through a downdraft.

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