Skip to main content

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

Comments

Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street profess

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing wh

Interactive Ads - Google one-ups Yahoo again

Google's ( GOOG ) press release describing the expansion of a beta program for what are being called Gadget Ads has again shown that Google is unparalleled at melding technology and advertising to benefit its bottom line. Gadget Ads are mini-web pages or "widgets" that can be embedded within publisher pages. I have written in the past on Yahoo's ( YHOO ) Smart Ads and how, by more precisely targeting site users and adjusting ad content accordingly, they provide a much desired evolution of the banner or display ad format. Though Smart Ads and Gadget Ads are not really the same, I think it is fair to say that Google has seen the challenge of Smart Ads and has chosen to leapfrog Yahoo by rolling out its own update to the display ad format. The evolution of the Gadget Ad -- One of the trends on the Internet over the last year or so involves software developers creating "widgets" which can be hosted within web pages and blogs. Widgets can be pretty much any