Friday, January 9, 2009

Recession Rule#1: Cash is King

In any downturn, cash is always harder to come by. In this environment, capital is especially hard to get. We've all heard the phrase "cash is king", and its usually true. But in this environment, it really is true. Companies with extra cash are better positioned to create a better competitive advantage over their competitors. This can be for a couple of reasons:

-Many companies need access to capital to finance expansions, or at a minimum daily operations. Companies with extra cash have no worries about getting credit downgrades or accessing capital if they need it.

-Cash rich companies can use the downturn to acquire smaller companies, or even competitors. When the market overshoots to the downside with market valuations, its a great time for companies with lots of cash to scoop up deals.

-Companies with lots of cash will always be attractive to investors, especially during the typical "flight to quality" that happens during market panics. Investments in these companies usually hold up better than their counterparts as investors get defensive.

In a recent interview, Cisco CEO John Chambers said "companies with cash are king, queen and the royal family." Cisco has close to $27 billion in cash and short-term investments, and the total continues to climb. hambers says Cisco is always aggressive in making acquisitions during downturns. He says the best time to make acquisitions is in downturns.

In another example, take a look at this quote from Nokia CEO Olli-Pekka Kallasuvo,

“When times are tougher, people who have stronger positions fare relatively better than the competition . . . So, overall, I believe many of our competitors will have limitations here in terms of their ability to do things.” Nokia has $4 billion net cash.
Nokia’s goal of increasing its market share in 2009 may also be assisted by the trend of consumers “trading down” to cheaper mobiles.

This is exactly what I've been talking about. Apple to PC, Blackberry to Nokia, Macy's to Wal-Mart... Not by choice, but necessity.

Some other companies with a lot of cash: Google, Microsoft, T Rowe Price, and Humana.

Cisco article via Barron's Tech Trader.

Nokia Article via Financial Times.

Disclosure: Long NOK

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