Just as your pulse is checked during a routine physical, free cash flow is used as an indicator of a company's health. It equals the cash brought in from operations minus the money needed to pay the bills. Think about leftover money in your checking account after you pay this month's bills.

Investors and analysts see this leftover money as a gauge of a company's ability to perform. It is available for transactions such as handing out dividends and working on new products.

Some argue free cash flow is wrongly overshadowed by the emphasis often placed on earnings. Earnings numbers can be manipulated and don't always tell the whole story -- and earnings don't mean much if there's nothing left over after a company pays its expenses. Even if you bring in a six-figure salary, but no money left after paying the bills, are you in great financial shape?

You don't have to be Einstein to figure out free cash flow. To calculate the number, subtract the company's expenditures and dividends from its operating cash flow.

If the free cash flow is written in red ink, it doesn't necessarily signal curtains. This is common for young companies looking to grow. It also could be a result of heavy investments, which in the long run could be worth a standing ovation.

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Monday, August 18, 2008

Buy Order

SPX Corp. Benefits from Diversity

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Dunstan Prial

FOXBusiness

SPX Corp. (SPW) is diverse enough, both in its products and services, as well as its roster of international customers, that it should easily weather a global economic downturn.

That’s why Frank Ingarra Jr., co-portfolio manager of the Hennessy Funds, said the company’s stock is expected to remain one of those included in the Hennessy Focus 30 fund, which readjusts its portfolio annually.

Ingarra said Charlotte, N.C.,-based SPX Corp. provides products and technical assistance

to an array of countries either just now building or in the process of repairing their infrastructures. The latter category includes the U.S. Even if its business slows down in the U.S. or in Europe due to tough economic times, customers in Asia can pick up the slack, Ingarra said.

Stocks that remain in the Hennessy Focus 30 fund for two consecutive years are something of a rarity. That’s because the fund, with $267 million in assets, adheres strictly to a formula from which the fund managers never deviate.

The formula requires mid-sized-capitalization stocks with a market cap below $10 billion (SPX has a market cap of $6.1 billion), and whose stock prices are growing in a fashion Goldilocks would approve – neither too fast nor too slow.

Ingarra said companies included in the Hennessy Focus 30 whose stock prices rise sharply are jettisoned from the fund when it readjusts each year because the stocks are deemed too expensive by the formula used to build the fund’s portfolio. Factors not taken into account by the formula include revenue growth and a company’s management team, according to Ingarra.

“We’re disciplined; we’re not emotional,” he said. “We stick to a very disciplined approach. When emotion enters the conversation, someone always loses.”

Nevertheless, Ingarra said SPX’s revenue growth in recent years was “nice to see.” Second-quarter revenues increased 29% to $1.56 billion, up from $1.21 billion a year earlier.

Founded in 1912 in Michigan as an automobile-components supplier, the company now provides products and services for a wide array of industries, including food and beverages, transportation, gas and oil production, agriculture, and pharmaceuticals and biotechnology. SPX, according to its Web site, has locations in more than 35 countries and employs more than 17,000 people, and makes everything from cooling systems for power plants and entertainment venues to specialized tools for making wind turbines.

Having diversified its operations a decade ago, the company now finds itself poised to take advantage of industrial growth in emerging countries such as China and India.