Key insights
- The author questions why highly cash-generative companies with substantial cash reserves are sometimes valued below book value, unlike growth stocks. They highlight a specific example of a non-US credit rating agency with consistent FCF generation and ROE, whose market cap is similar to its cash balance. The author is puzzled by the market's apparent insensitivity to accumulated cash compared to earnings changes. This may reflect investor concerns about the company's future growth prospects or capital allocation decisions.
I am having trouble wrapping my head around why in general, highly cash generative companies with significant amounts of cash accumulated are valued below book value vs. growth stocks that quickly reflect their earnings in their market cap.
And I am not looking at companies with negative growth or one off profits or cyclical business models. This is a non-US credit rating company that generates FCF year after year for the previous 20 years at 15-20% ROE. 3-5% dividends. Market cap is similar to cash balance. There are also other similar undervalued companies that share these characteristics.
What am I missing? Why is price so less sensitive to the cash being accumulated on book vs. changes in earnings?