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Tuesday, February 10, 2009

Coverage ratio - what stocks can we uncover in the S&P 500?

Credit markets are still fairly frozen and making it difficult for companies to issue new debt. With earnings estimates seemingly in free fall, I thought it might be interesting to run a screen that identifies those companies who are expected to be well positioned to avoid problems related to carrying their current total debt load.

This screen is based on the Cash Flow to Debt Coverage Ratio. This compares a company's operating cash flow to its total debt, which, for purposes of this ratio, is defined as the sum of short-term borrowings, the current portion of long-term debt and long-term debt. This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability to carry its total debt.

In our screen, we looked for companies whose debt coverage ratio is 0.75 or more. In scanning 7400 stocks, we came up with a list of 251 companies. We then cross-referenced this list with the S&P 500. The result is the following list of 23 stocks (prices as of the close on 2/10/09):

Symbol Name Sector Last Price
AFL AFLAC Inc. Financials $22.13
BCR Bard (C.R.) Inc. Health Care $85.00
CF CF Industries Holdings Inc Materials $53.60
COH Coach Inc. Consumer Discretionary $14.31
GPS Gap (The) Consumer Discretionary $11.50
JEC Jacobs Engineering Group Industrials $40.68
MO Altria Group Inc. Consumer Staples $16.47
OXY Occidental Petroleum Energy $55.44
RHI Robert Half International Industrials $17.38
SWN Southwestern Energy Energy $32.18
SYK Stryker Corp. Health Care $41.33
TIE Titanium Metals Corp Materials $7.68
WFR MEMC Electronic Materials Information Technology $14.57
XOM Exxon Mobil Corp. Energy $76.14
ADBE Adobe Systems Information Technology $20.48
AMZN Amazon Corp. Consumer Discretionary $63.31
APOL Apollo Group Consumer Discretionary $81.57
ADSK Autodesk Inc. Information Technology $17.20
CTXS Citrix Systems Information Technology $22.88
JNPR Juniper Networks Information Technology $15.65
MSFT Microsoft Corp. Information Technology $18.80
QCOM QUALCOMM Inc. Information Technology $35.02
YHOO Yahoo Inc. Information Technology $12.75

It's no surprise that the Financial sector has few representatives on this list as companies in this sector tend to issue large quantities of debt as a matter of course.

It's interesting to see that the majority of stocks in this list are tech stocks (ie: in the Information Technology sector). I am surprised to see Yahoo, though; there must be more value in the company than meets the eye. Or maybe they are smart enough to manage their debt load well and lucky enough to maintain reasonable cash flow despite the fall-off in earnings the company has experienced recently.

Another surprise is the presence of some of the beaten down retail stocks like Coach and Gap in the Consumer Discretionary sector. I wouldn't have expected to see them in this strong a financial situation given how consumers seem to have gone on strike lately. On the other hand, Amazon is firing on all cylinders lately and this is a confirmation of that company's health. Note that Amazon is one of the stocks that was recently identified as a BUY in our Alert HQ.

In any case, an investor can use this list as a guide to companies that are not only conservative in taking on debt but that are also cash flow positive. Those are two characteristics that are always valuable in any investment.

Disclosure: none

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