Sonics improving debt position:
|Cash and Short Term Investments||$86||$29||$52|
As I have mentioned, Sonic Corporation (NASDAQ:SONC) had negative shareholder equity up until 2010, but the company has since been working to improve this and has driven debt down 15% since 2010 – total debt has fallen nearly 20%. Sonic does have the highest level of gearing out of these three stocks, but the company is working hard to bring it down and that is why I chose it.
|Net Operating Cash Flow||$89||$78||$84||$95|
|Net Investing Cash Flow||$52||-$9||-$16||-$24|
|Free Cash Flow||$52||$53||$63||$71|
|Issue/(reduction of debt)||($50)||($106)||($129)||($15)|
Sonic’s business is highly cash generative as shown above. The company does not need to spend a huge amount on investing, and its products have a very high margin leading to strong operating cash flows. Free cash flow has average about 70% of operating cash flow over the past four years, giving the company plenty of cash to pay off debt.
As Sonic’s main business is food, the company cannot hold much stock, as it is perishable. Indeed, Sonic Corporation (NASDAQ:SONC)’s quick and current ratio are the same, but both strong and greater than 1, which shows the company is able to easily cover all of its liabilities falling due within 12 months.
Lastly, as shareholder retuns go, Sonic does let the team down. Sonic’s current debt reduction operations are not leaving much free cash for dividends, but the company did manage a $30 million share buyback during 2012, which cost nearly 100% of the company’s net income for the year – Sonic is trying hard.
So who wins?
Well, overall Cyberonics has the best balance sheet, the strongest cash flows and the most defensive product, but lags on shareholder returns. Cooper has good cash flows, a strong balance sheet, and is attempting to return cash to shareholders. Finally, Sonic is the recovery play of the group with good cash flows but a poor balance sheet that is held back with debt.
So overall I believe Cooper Tyre and Rubber is the best stock here, and the company that has the best potential.
The article Three Future Winners You Should Look At originally appeared on Fool.com and is written by Rupert Hargreaves.
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