• Winners and Losers From Intel's Warning
• Time to Short Qwest?
• Time to Short Orthovita?
• Time to Short Nuance Communications?
• Is Trouble Ahead for Intuitive Surgical?
• Meet the Cash Kings of Personal Care
• Microsoft's Bold Plan to Reinvent Itself
• The One Thing to Know About Google
• Meet the Cash Kings of Electronic Equipment
• Why Smartphone Market Share Numbers Will Fool You

Winners and Losers From Intel's Warning

When the undisputed kingpin of the semiconductor industry, Intel (Nasdaq: INTC) , makes an earnings or demand announcement, the effects ripple far and wide. So when Intel announced Friday that revenue is going to come in below expectations, an already jittery industry took one step closer to the edge.

Join the club, Intel
Intel's warning focuses on consumer weakness, which isn't exactly new information. It can join NVIDIA (Nasdaq: NVDA) in the blaming-consumers-for-worse-than-expected-results club. NVIDIA closed out last quarter with $811 million in sales, significantly below its initial guidance of $950 to $970 million. The culprit behind NVIDIA's stunning revenue miss: weak consumer demand. Oh, and the favorite punching bag of executives blowing earnings: Europe.

Buy this smartphone, not that PC
Beyond the general economic woes that are causing consumers to spend less, the PC industry faces an alarming shift in consumer spending habits. The explosion of smartphones and tablets isn't causing consumers to spend more on electronics; the Consumer Electronics Association expects consumer electronics sales to be flat in 2010.

Instead, consumers are shifting their electronics dollars away from expensive PCs, where Intel gets higher sales and better margins, and toward tablets and smartphones, where Intel's processor offerings either aren't as competitive or don't exist. The average age of PCs has risen to its highest level in a decade, 4.4 years. Consumers are sticking with old PCs while buying the newest iPhone or Blackberry.

That should spell some future problems for AMD (NYSE: AMD) . When Intel reported its last record-shattering quarter, strong enterprise spending was the driving factor. AMD's recent quarter focused on its strength in the consumer market. Whatever pains Intel is seeing should only be amplified at its smaller rival.

More winners and losers
However, while Intel's results should have a general downward pull on the IT industry, it'd be wrong to apply that weakness to a wide swath of companies.

For one, Intel affirmed that demand from large companies remains strong. That's good news for companies targeting sales to large businesses. Outside of semiconductors, the announcement shouldn't reflect any weakness in companies such as EMC in the booming storage industry or enterprise-focused sellers like STEC (Nasdaq: STEC) . Nor should the announcement have much of an effect on semiconductor companies Qualcomm (Nasdaq: QCOM) or Broadcom , which derive significant sales from the smartphone market. Intel's warning only further points to the continuing success of small, connected devices.

However, the warning is a bad omen for hard-drive makers Western Digital and Seagate (Nasdaq: STX) . These two companies have higher exposure to PCs, and less to booming markets like smartphones that use solid state drives (SSDs). Neither Western Digital nor Seagate have much exposure to those markets. The warning is also bad news for an obscure software outfit from Redmond named Microsoft (Nasdaq: MSFT) , which presumably sells software that are on most PCs.

Bottom line
Intel's announcement once again demonstrates the significant shift going on in consumer spending. That shift puts all the more pressure on Intel's new Moorestown processorto enter the market and be a smashing success. The winners of a previous technological generation are rarely the winners of the next. Unless Intel wants to be another example of that axiom, it'd be better off spending less money buying software companiesand more money winning the war to power mobile phones and tablets.

This article was originally published as Winners and Losers From Intel's Warningon Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

Time to Short Qwest?

At Fool.com, we believe in buying great companies for the long term. However, not every company commands a fair price, and many trade for far more than they're actually worth.

In these situations, investors actually have a chance to benefit from a stock's plunge. When shorting a stock, an investor bets that price of a stock will go down, and profits from any downward movement. The practice is risky, inviting unlimited losses while only providing limited upside. However, shorting wildly overvalued companies can also help balance your portfolio against the wild market swings we’ve seen in previous years.

To find shorting candidates, we screened for stocks with a high percentage of their publicly traded shares sold short. One such stock is Qwest (NYSE: Q) , with a current short interest of 7.4%.  That’s pretty high, but let’s see how it compares to other companies in its industry:

Source: Capital IQ, a division of Standard & Poor’s

We consider short interest greater than 5% to be a warning sign. While plenty of great companies can carry high short interest, that red flag is your invitation to dig for troubling information that the company's buyers might be missing.  

When evaluating short candidates, start by assessing their near-term financial health. To check on Qwest’s immediate health, we looked at its current ratio, which simply divides its current assetsby its current liabilities. The more assets a company has -- cash, inventory, and accounts receivable, among others -- the more easily it should be able to pay off its obligations in times of financial distress. 

Qwest's ratio in this category is a bit shaky, currently standing at 0.9.  We look for current ratios greater than 1.0, meaning that a company could use its current assets to immediately fund liabilities, if it had to. Just remember that such situations are rare, and that companies can also raise money with other assets if need be. It's best to dig into Qwest's filings to see whether the company faces any short-term liquidity challenges.

Source: Capital IQ, a division of Standard & Poor’s

Once we’ve assessed a company’s short-term financial health, next we determine whether it’s overstating its earnings. Earnings are meant to show a smoothed-out picture of a company’s profit potential over time. However, they’re prone to various assumptions and manipulations. Companies can aggressively recognize revenue, or show high earnings even while they pour excessive amounts of cash into capital expenditures that are slowly accounted for over time.

For this reason, it’s best to compare free cash flow to earnings. Free cash flowaccounts for the actual cash flowing out of or into a business, and then subtracts out actual capital expenditure costs over a given period of time.  In the last twelve months,  Qwest’s  cash flow has been $1,842.00 million while their earnings were $440.00 million.

Qwest's free cash flow has outperformed its earnings on average. That's generally a good sign that shows the company has been more conservative with its accounting and isn't using sleight-of-hand tricks to overstate its earnings potential.

Source: Capital IQ, a division of Standard & Poor’s

One last consideration for shorting a company is valuation. Excellent companies often trade for prices that aren’t justified by their business's long-term outlook. Think back to the dot-com bubble: While technology companies like Amazon.com would eventually produce large profits, at the time, they lacked business models and future earnings streams to justify their mammoth market capitalizations.

The PEG ratiois a simple measure of whether a company is excessively valued. It  compares a company’s P/E ratio to its estimated growth rate.  We compared Qwest’s expected P/E ratio of the next 12 months relative to its 5-year estimated growth rate. As an investor, you’d look for companies trading at P/Es less than their growth rate.  As seen in the table below, Qwest currently trades at PEG ratio of 4.9.

Company

Forward P/E

5-Year Growth Estimate %

5-Year PEG Ratio

Qwest Communications

14.7

3

4.9

AT&T (NYSE: T)

11.2

6

1.9

Verizon Communications (NYSE: VZ)

13.5

4

3.4

Time Warner Cable (NYSE: TWC)

13.2

13

1.0

Source: Capital IQ, a division of Standard & Poor's.

With a PEG ratio greater than 1.5, short interest is likely targeting Qwest on account of its significant P/E premium relative to its growth potential.

The long road to superior shorting
Identifying good short candidates requires diligent research. More importantly, you've got to know whereto dig into a company's financial statements. While the measures we showed above are a great start in searching for shorting candidates, red flags like accelerating revenue recognition, aggressive acquisitions to hide underlying financial weakness, and changes in reporting methods can only be spotted by carefully analyzing the notes companies bury deep in their filings.

Finding these opportunities requires skill, but you can do it. That’s why John Del Vecchio, CFA, a leading forensic accountant and The Motley Fool’s shorting specialist, put together a detailed report that shows you how to spot five serious red flags that can help you detect time bombs in your portfolio and lead you to the next big short. You can get the entire report free by clicking hereor by entering your email address in the box below.

Jeremy Phillips does not own shares of the companies mentioned. Amazon.com is a Stock Advisor recommendation.

This article was originally published as Time to Short Qwest?on Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

Time to Short Orthovita?

At Fool.com, we believe in buying great companies for the long term. However, not every company commands a fair price, and many trade for far more than they're actually worth.

In these situations, investors actually have a chance to benefit from a stock's plunge. When shorting a stock, an investor bets that price of a stock will go down, and profits from any downward movement. The practice is risky, inviting unlimited losses while only providing limited upside. However, shorting wildly overvalued companies can also help balance your portfolio against the wild market swings we’ve seen in previous years.

To find shorting candidates, we screened for stocks with a high percentage of their publicly traded shares sold short. One such stock is Orthovita (Nasdaq: VITA) , with a current short interest of 6.1%.  That’s pretty high, but let’s see how it compares to other companies in its industry:

Source: Capital IQ, a division of Standard & Poor’s

We consider short interest greater than 5% to be a warning sign. While plenty of great companies can carry high short interest, that red flag is your invitation to dig for troubling information that the company's buyers might be missing. 

When evaluating short candidates, start by assessing their near-term financial health. To check on Orthovita’s immediate health, we looked at its current ratio, which simply divides its current assetsby its current liabilities. The more assets a company has -- cash, inventory, and accounts receivable, among others -- the more easily it should be able to pay off its obligations in times of financial distress. 

Orthovita's ratio in this category is solid, at 6.8. We look for a current ratio greater than 1.0:

Source: Capital IQ, a division of Standard & Poor’s

Once we’ve assessed a company’s short-term financial health, next we determine whether it’s overstating its earnings. Earnings are meant to show a smoothed-out picture of a company’s profit potential over time. However, they’re prone to various assumptions and manipulations. Companies can aggressively recognize revenue, or show high earnings even while they pour excessive amounts of cash into capital expenditures that are slowly accounted for over time.

For this reason, it’s best to compare free cash flow to earnings. Free cash flowaccounts for the actual cash flowing out of or into a business, and then subtracts out actual capital expenditure costs over a given period of time.  In the last twelve months,  Orthovita’s  cash flow has been -$7.39 million while their earnings were -$3.77 million.

Orthovita's free cash flow has trailed earnings on average. In this case, it's a good idea to open up company filings and explore what's causing this cash flow lag. If free cash flow is showing a consistent trend of underperforming earnings, that could mean the company is overvalued according to its stated earnings.  Alternately, it might be recognizing earnings too aggressively, which could lead to free cash flow declines in the future.

Source: Capital IQ, a division of Standard & Poor’s

One last consideration for shorting a company is valuation. Excellent companies often trade for prices that aren’t justified by their business's long-term outlook. Think back to the dot-com bubble: While technology companies like Amazon.com would eventually produce large profits, at the time, they lacked business models and future earnings streams to justify their mammoth market capitalizations.

The PEG ratiois a simple measure of whether a company is excessively valued. It  compares a company’s P/E ratio to its estimated growth rate.  We compared Orthovita’s expected P/E ratio of the next 12 months relative to its 5-year estimated growth rate. As an investor, you’d look for companies trading at P/Es less than their growth rate.  As seen in the table below, Orthovita currently trades at PEG ratio of 2.5.

Company

Forward P/E

5-Year Growth Estimate %

5-Year PEG Ratio

Orthovita

52.8

21.5

2.5

NuVasive (Nasdaq: NUVA)

23.8

50

0.5

Micrus Endovascular (Nasdaq: MEND)

27.7

19.4

1.4

RTI Biologics (Nasdaq: RTIX)

12.5

16

0.8

Source: Capital IQ, a division of Standard & Poor's.

With a PEG ratio greater than 1.5, short interest is likely targeting Orthovita on account of its significant P/E premium relative to its growth potential.

The long road to superior shorting
Identifying good short candidates requires diligent research. More importantly, you've got to know where to dig into a company's financial statements. While the measures we showed above are a great start in searching for shorting candidates, red flags like accelerating revenue recognition, aggressive acquisitions to hide underlying financial weakness, and changes in reporting methods can only be spotted by carefully analyzing the notes companies bury deep in their filings.

Finding these opportunities requires skill, but you can do it. That’s why John Del Vecchio, CFA, a leading forensic accountant and The Motley Fool’s shorting specialist, put together a detailed report that shows you how to spot five serious red flags that can help you detect time bombs in your portfolio and lead you to the next big short. You can get the entire report free by clicking hereor by entering your email address in the box below.

Jeremy Phillips does not own shares of the companies mentioned. Amazon.com is a Stock Advisor recommendation.

This article was originally published as Time to Short Orthovita?on Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

Time to Short Nuance Communications?

At Fool.com, we believe in buying great companies for the long term. However, not every company commands a fair price, and many trade for far more than they're actually worth.

In these situations, investors actually have a chance to benefit from a stock's plunge. When shorting a stock, an investor bets that price of a stock will go down, and profits from any downward movement. The practice is risky, inviting unlimited losses while only providing limited upside. However, shorting wildly overvalued companies can also help balance your portfolio against the wild market swings we’ve seen in previous years.

To find shorting candidates, we screened for stocks with a high percentage of their publicly traded shares sold short. One such stock is Nuance Communications (Nasdaq: NUAN) , with a current short interest of 9.6%.  That’s pretty high, but let’s see how it compares to other companies in its industry:

Source: Capital IQ, a division of Standard & Poor’s

We consider short interest greater than 5% to be a warning sign. While plenty of great companies can carry high short interest, that red flag is your invitation to dig for troubling information that the company's buyers might be missing. 

When evaluating short candidates, start by assessing their near-term financial health. To check on Nuance Communications’s immediate health, we looked at its current ratio, which simply divides its current assetsby its current liabilities. The more assets a company has -- cash, inventory, and accounts receivable, among others -- the more easily it should be able to pay off its obligations in times of financial distress. 

Nuance Communications's ratio in this category is solid, at 2.2. We look for a current ratio greater than 1.0:

Source: Capital IQ, a division of Standard & Poor’s

Once we’ve assessed a company’s short-term financial health, next we determine whether it’s overstating its earnings. Earnings are meant to show a smoothed-out picture of a company’s profit potential over time. However, they’re prone to various assumptions and manipulations. Companies can aggressively recognize revenue, or show high earnings even while they pour excessive amounts of cash into capital expenditures that are slowly accounted for over time.

For this reason, it’s best to compare free cash flow to earnings. Free cash flowaccounts for the actual cash flowing out of or into a business, and then subtracts out actual capital expenditure costs over a given period of time.  In the last twelve months,  Nuance Communications’s  cash flow has been $239.01 million while their earnings were -$9.55 million.

Nuance Communications's free cash flow has outperformed its earnings on average. That's generally a good sign that shows the company has been more conservative with its accounting and isn't using sleight-of-hand tricks to overstate its earnings potential.

Source: Capital IQ, a division of Standard & Poor’s

One last consideration for shorting a company is valuation. Excellent companies often trade for prices that aren’t justified by their business's long-term outlook. Think back to the dot-com bubble: While technology companies like Amazon.com would eventually produce large profits, at the time, they lacked business models and future earnings streams to justify their mammoth market capitalizations.

The PEG ratiois a simple measure of whether a company is excessively valued. It  compares a company’s P/E ratio to its estimated growth rate.  We compared Nuance Communications’s expected P/E ratio of the next 12 months relative to its 5-year estimated growth rate. As an investor, you’d look for companies trading at P/Es less than their growth rate.  As seen in the table below, Nuance Communications currently trades at PEG ratio of 0.9.

Company

Forward P/E

5-Year Growth Estimate %

5-Year PEG Ratio

Nuance Communications

12.2

13

0.9

Adobe Systems (Nasdaq: ADBE)

85.2

25

3.4

Cisco Systems (Nasdaq: CSCO)

13.5

15

0.9

Microsoft (Nasdaq: MSFT)

19.0

20

1.0

Source: Capital IQ, a division of Standard & Poor's.

With a PEG ratio of less than 1.0, Nuance Communications looks attractively valued relative to its expected growth. Investors shorting the stock are either looking at other areas of concern, or feel analyst growth estimates have overstated the company’s potential.

The long road to superior shorting
Identifying good short candidates requires diligent research. More importantly, you've got to know whereto dig into a company's financial statements. While the measures we showed above are a great start in searching for shorting candidates, red flags like accelerating revenue recognition, aggressive acquisitions to hide underlying financial weakness, and changes in reporting methods can only be spotted by carefully analyzing the notes companies bury deep in their filings.

Finding these opportunities requires skill, but you can do it. That’s why John Del Vecchio, CFA, a leading forensic accountant and The Motley Fool’s shorting specialist, put together a detailed report that shows you how to spot five serious red flags that can help you detect time bombs in your portfolio and lead you to the next big short. You can get the entire report free by clicking hereor by entering your email address in the box below.

Jeremy Phillips does not own shares of the companies mentioned. Amazon.com is a Stock Advisor recommendation. Microsoft is a Motley Fool Inside Value pick. Adobe Systems and Nuance Communications are Motley Fool Stock Advisor recommendations. Nuance Communications is a Motley Fool Hidden Gems selection. The Fool has written calls (Bull Call Spread) on Cisco Systems. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services free for 30 days . The Motley Fool has a disclosure policy .

This article was originally published as Time to Short Nuance Communications?on Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

Is Trouble Ahead for Intuitive Surgical?

At Fool.com, we believe in buying great companies for the long term. However, not every company commands a fair price, and many trade for far more than they're actually worth.

In these situations, investors actually have a chance to benefit from a stock's plunge. When shorting a stock, an investor bets that price of a stock will go down, and profits from any downward movement. The practice is risky, inviting unlimited losses while only providing limited upside. However, shorting wildly overvalued companies can also help balance your portfolio against the wild market swings we’ve seen in previous years.

To find shorting candidates, we screened for stocks with a high percentage of their publicly traded shares sold short. One such stock is Intuitive Surgical (Nasdaq: ISRG) , with a current short interest of 7.6%.  That’s pretty high, but let’s see how it compares to other companies in the health care industry:

Source: Capital IQ, a division of Standard & Poor’s

We consider short interest greater than 5% to be a warning sign. While plenty of great companies can carry high short interest, that red flag is your invitation to dig for troubling information that the company's buyers might be missing.  While Stryker (NYSE: SYK) and Medtronic (NYSE: MDT) may be more established in their field, there’s still those who question whether Intuitive Surgical can keep up growing its novel robotic surgery equipment at a blazing pace. Its higher relative valuation probably leads to increased short interest.

When evaluating short candidates, start by assessing their near-term financial health. To check on Intuitive Surgical’s immediate health, we looked at its current ratio, which simply divides its current assetsby its current liabilities. The more assets a company has -- cash, inventory, and accounts receivable, among others -- the more easily it should be able to pay off its obligations in times of financial distress. 

Intuitive Surgical's ratio in this category is solid, at 5.2. We look for a current ratio greater than 1.0:

Source: Capital IQ, a division of Standard & Poor’s

Once we’ve assessed a company’s short-term financial health, next we determine whether it’s overstating its earnings. Earnings are meant to show a smoothed-out picture of a company’s profit potential over time. However, they’re prone to various assumptions and manipulations. Companies can aggressively recognize revenue, or show high earnings even while they pour excessive amounts of cash into capital expenditures that are slowly accounted for over time.

For this reason, it’s best to compare free cash flow to earnings. Free cash flowaccounts for the actual cash flowing out of or into a business, and then subtracts out actual capital expenditure costs over a given period of time.  In the last twelve months,  Intuitive Surgical’s  cash flow has been $453.44 million while their earnings were $316.11 million.

Intuitive Surgical's free cash flow has outperformed its earnings on average. That's generally a good sign that shows the company has been more conservative with its accounting and isn't using sleight-of-hand tricks to overstate its earnings potential. As an investor, make sure to keep an eye on stock based compensation. While its not excluded in this analysis, companies that issue high amounts of stock-based compensation (Intuitive has issued over $100 million worth in the past year) will eventually need to re-buy shares to offset dilution, causing a reduction in cash.

Source: Capital IQ, a division of Standard & Poor’s

One last consideration for shorting a company is valuation. Excellent companies often trade for prices that aren’t justified by their business's long-term outlook. Think back to the dot-com bubble: While technology companies like Amazon.com would eventually produce large profits, at the time, they lacked business models and future earnings streams to justify their mammoth market capitalizations.

The PEG ratiois a simple measure of whether a company is excessively valued. It  compares a company’s P/E ratio to its estimated growth rate.  We compared Intuitive Surgical’s expected P/E ratio of the next 12 months relative to its 5-year estimated growth rate. As an investor, you’d look for companies trading at P/Es less than their growth rate.  As seen in the table below, Intuitive Surgical currently trades at PEG ratio of 1.1.

Company

Forward P/E

5-Year Growth Estimate %

5-Year PEG Ratio

Intuitive Surgical

28.6

25

1.1

Medtronic

9.1

9.2

1.0

Stryker

12.5

12.1

1.0

Source: Capital IQ, a division of Standard & Poor's.

As alluded to earlier, Intuitive is a growth company that sports a fairly steep P/E. With a PEG ratio between 1.0 and 1.5, Intuitive Surgical is somewhat richly valued on a price-to-growth basis. Investors might consider its valuation slightly too rich for its growth prospects, but there isn't a huge disconnect there.

The long road to superior shorting
Identifying good short candidates requires diligent research. More importantly, you've got to know whereto dig into a company's financial statements. While the measures we showed above are a great start in searching for shorting candidates, red flags like accelerating revenue recognition, aggressive acquisitions to hide underlying financial weakness, and changes in reporting methods can only be spotted by carefully analyzing the notes companies bury deep in their filings.

Finding these opportunities requires skill, but you can do it. That’s why John Del Vecchio, CFA, a leading forensic accountant and The Motley Fool’s shorting specialist, put together a detailed report that shows you how to spot five serious red flags that can help you detect time bombs in your portfolio and lead you to the next big short. You can get the entire report free by clicking hereor by entering your email address in the box below.

Jeremy Phillips does not own shares of the companies mentioned. Amazon.com is a Stock Advisor recommendation. Stryker is a Motley Fool Inside Value recommendation. Intuitive Surgical is a Motley Fool Rule Breakers  pick. The Fool owns shares of Medtronic. The Motley Fool has a disclosure policy.

This article was originally published as Is Trouble Ahead for Intuitive Surgical?on Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

Meet the Cash Kings of Personal Care

As an investor, it pays to follow the cash. If you figure out how a company moves its money, you might eventually find some of that cash flowing into your pockets.

In this series, we'll highlight three big dogs in an industry, and compare their "cash king margins" over time, trying to determine which has the greatest likelihood of putting cash back in your pocket. After all, a company can pay dividends and buy back stock only after it's actually received cash -- not just when it books those accounting figments known as "profits."

The cash king margin
Looking at a company's cash flow statement can help you determine whether its free cash flow actually backs up its reported profit. Companies that can create 10% or more free cash flow from their revenue can be powerful compounding machines for your portfolio.

To find the cash king margin, divide the free cash flow from the cash flow statement by sales:

Cash king margin = Free cash flow / sales

Let's take Nike as an example. Over the last four quarters, the footwear giant generated $3.2 billion in operating cash flow. It invested about $335 million in property, plant, and equipment. To calculate free cash flow, subtract Nike's investment ($335 million) from its operating cash flow ($3.2 billion). That leaves us with $2.8 billion in free cash flow, which the company can save for future expenditures or distribute to shareholders.

Taking Nike's sales of $19 billion over the same period, we can figure that the company has a cash king margin of about 15% -- a nice high number. In other words, for every dollar of sales, Nike produces $0.15 in free cash.

Ideally, we'd like to see the cash king margin top 10%. The best blue chips can notch numbers greater than 20%, making them true cash dynamos. But some businesses, including many types of retailing, just can't sustain such margins.

We're also looking for companies that can consistently increase their margins over time, which indicates that their competitive position is improving. Erratic swings in margins could signal a deteriorating business, or perhaps some financial skullduggery; you'll have to dig deeper to discover the reason.

Three companies
Today, let's look at three companies in the personal care industry:

Company

Cash King Margin (TTM)

1 Year Ago

3 Years Ago

5 Years Ago

Colgate-Palmolive (NYSE: CL)

17.8%

12.1%

11.4%

13.1%

Clorox (NYSE: CLX)

10.6%

9.9%

11.6%

14.0%

Church & Dwight (NYSE: CHD)

8.9%

10.5%

8.5%

8.4%

Source: Capital IQ, a division of Standard & Poor's; TTM = trailing 12 months.

Colgate-Palmolive clearly has the fat margins here, and it's one of my favorite companies because of its defensive character. The company has boosted margins from five years ago, but I question its ability to maintain the high level of the last four quarters, given that margins slipped three years ago. Clorox, too, had been falling before the recession, while Church & Dwight (another favorite) has been rising but is still off from a year ago. Personal-care companies can offer attractive returns, in part, because their products are sticky: consumers come back repeatedly to personal products that they trust. Still, these margins pale in comparison to those offered by softwareand biotechcompanies.

The cash king margin can help you find highly profitable businesses, but it should only be the start of your search. The ratio does have its limits, especially for fast-growing small businesses. Many such companies reinvest all of their cash flow into growing the business, leaving them little or no free cash -- but that doesn't necessarily make them poor investments. You'll need to look closer to determine exactly how a company is using its cash.

Still, if you can cut through the earnings headlines to follow the cash instead, you might be on the path toward seriously great investments.

The Motley Fool is buying 50 stocks in 50 days for its "11 O'clock Stock" series. For more information, click here . Then come back to Fool.com every single weekday at 11 a.m. ET for a brand-new pick!

This article was originally published as Meet the Cash Kings of Personal Careon Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

Microsoft's Bold Plan to Reinvent Itself

Microsoft (Nasdaq: MSFT) became dominant by shunning hardware and controlling the code that powered it. However, the winds of change are blowing, and the Redmond giant is belatedly starting to make moves. Five years ago, the idea of a Microsoft-designed processor would have sounded like lunacy. Then again, five years ago the idea of Intel buying a company specializing in security and anti-virus software would have sounded pretty outrageous, too. My, how things have changed.

Microsoft, no stranger to hardware
It's not that Microsoft hasn't been involved with hardware in the past. The company has long sold Microsoft-branded peripheral products like keyboards, mice, and joysticks. More importantly, Microsoft's foray into gaming gave the company experience designing hardware systems to go along with software.

In fact, the expertise Microsoft has acquired from designing the Xbox and Xbox 360 is underappreciated. Microsoft recently pulled the covers off the insides of its new slimmed-down Xbox 360, revealing an IBM (NYSE: IBM) -produced System-on-a-Chip (SoC) that beats AMD 's Fusion chipto a high-powered design that puts the graphics and central processor on the same chip.

Long story short, the new Xbox 360 has some impressive engineering. What's important is that Microsoft's ownengineers apparently were responsible for a lion's share of the complicated layout work.

A new path
Microsoft's growing expertise in hardware design comes at a time when its main rival, Apple (Nasdaq: AAPL) , has had phenomenal success controlling both the hardware and software of the iPhone. While Google 's (Nasdaq: GOOG) Android has seen remarkable growth by following a Microsoft-like strategy of forgoing hardware in favor of software distribution, that path is probably closed to Microsoft.

Google has built up a significantly larger installed base and collection of applications, and it has the support of most major hardware companies that don't have their own operating system. Also, Google gives its operating system away for free; Microsoft charges for licenses to its mobile operating system. In the face of all these threats and the diminished chances for profitability due to Google's "free" strategy and lead, it's no surprise Microsoft would look to shift closer to Apple's mobile game plan.

Microsoft has long explored the idea of adopting a strategy in line with Apple. There have been persistent rumors of a Zune phone, as well as reports of Microsoft being interested in purchasing Research In Motion (Nasdaq: RIMM) , another company that melds its own mobile software and hardware.

Finally, there was the recent purchaseof a "microarchitecture" license from Arm Holdings . The news was significant because what Microsoft purchased is a more expensive license that allows it to develop its own processor cores around Arm's technology. Can you think of another company that's loaded up on mobile processor engineering talent? Oh yes, Apple. It purchased bothIntrinsity and P.A. Semi to beef up its ability to design processors of its own specification that could consume less power and perform better.

To the future!
Maybe Microsoft's logic behind buying the Arm-license is something out of left field. Microsoft has put particular emphasis behind Windows Phone 7's ability to sync with users' Xbox Live accounts and act as a powerful gaming device. Perhaps the license purchase is meant to create an enhanced processor design for gaming purposes.

However, the most obvious conclusion is the right one: Microsoft wants to get more involved with designing the hardware that melds with its software. If Microsoft had more expertise in this area, maybe its promising Courier concept could have hit store shelves sooner rather than stagnating within the company and eventually being cancelled. More importantly, it gives the impression that Microsoft is willing to push the envelope in finding a way to make its mobile operating system relevant again.

Hey, it's a long shot, but I'll take it over the status quo. The software Microsoft is dead -- long live the new Microsoft.

The Motley Fool is buying 50 stocks in 50 days for its new "11 O'clock Stock" series. For more information, click here . Then come back to Fool.com every single weekday at 11 a.m. ET for a brand-new pick!

This article was originally published as Microsoft's Bold Plan to Reinvent Itselfon Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

The One Thing to Know About Google

I know it sounds ludicrous, but investors often overlook the people in charge of protecting their investments. The idea of gauging a company’s leadership plays second-fiddle to other categories of analysis. However, at Fool.comwe believe careful study of effective leadership is one of the most important areas of evaluating long-term winning investments.

We like CEOs who actually work for shareholders like us. After all, we're the true owners of the business. When you're deciding whether to invest in a company, failing to vet its CEO is a big mistake. In fact, if you’ve overlooked the study of a company’s leadership, then that’s the one important area you should know about before finalizing your investment in the company.

After reviewing thousands of companies over dozens of years, we've found several crucial characteristics of quality management. Today, we'll size up the recent performance of Google’s   (Nasdaq: GOOG) leadership.

How much skin do they have in the game?
Are Google CEO Eric Schmidt’s interests aligned with shareholders? Here’s how the Google CEO’s ownership compares to that of other companies in the industry.

CEO, Company

Shares Owned

% of Shares Outstanding

Insider Ownership Market Value (in millions)

Eric Schmidt, Google

9,372,741

2.94%

$4,330

John Donahoe, eBay

143,509

0.01%

$3

Yanhong Li, Baidu

72,395,810

20.80%

$5,949

Source: Capital IQ, a division of Standard & Poor's. Shares are common stock equivalents only and do not include options, awards, and other forms of compensation.

Eric Schmidt owns over $4 billion worth of Google, or 2.94% of shares outstanding. When CEOs  invest a significant amount of their net worth in their own companies, we believe they're more likely to act in ways that generate long-term gains.  This will ultimately increase shareholder value and their own wealth. Between Eric Schmidt and co-founders Sergey Brin and Larry Page, Google has a high degree of ownership between its executive team.

How well are they using your money?
Return on equity can help investors determine how adeptly management gets the job done. This metric combines how well management is expanding profitability, managing assets, and using financial leverage, all in one ratio. While return on equity isn't foolproof -- managers can manipulate it with excessive leverage, for example -- it does an excellent job of suggesting how effective managers are, and how well they can generate high returns on investors' capital.

Here’s a look at Google’s recent return on equity:

Google’s current return on equity falls below its five-year average. While recent economic conditions have been challenging, declining return on equity shows either that management hasn’t been able to control costs and manage assets, or that it's failed to move into higher-return businesses over the last five years. In Google’s case, while net income margin has remained fairly high after a dip in 2008, the equity on its balance sheet has been increasing along with profitability. One concern to shareholders might be the companies inability to monetize non-search products. Google has a history of rapidly creating product lines that don’t always have a tangible way to produce income to the company. That could be troubling to shareholders.

How productive are their workers?
Revenue per employee provides another way to gauge a CEO's effectiveness. If this metric is declining, the company might have a bloated organizational structure, or too many extra employees toiling away at new initiatives that just aren't working out. Either possibility would hint that management isn't effectively running the organization.

Source: Capital IQ, a division of Standard & Poor's.

As you can see, Google’s revenue per employee has moved above its five-year average.  Rising revenue per employee can suggest that management's getting better at controlling costs, or encouraging more productivity from its workers. To better see whether Google’s management is excelling in this area, let’s compare the company to its peer group once again:

Company

2005

2007

2009

Last Year's Revenue Per Employee vs. 5-Year Average

Google

$1,081

$987

$1,192

12%

eBay (Nasdaq: EBAY)

$392

$495

$532

10%

Baidu (Nasdaq: BIDU)

$30

$38

$89

67%

Source: Capital IQ, a division of Standard & Poor's. Dollar figures in thousands.

Google’s been growing its revenue per employee. The fact the company has grown its revenue per employee might help quell some concerns it has over-hired in recent quarters.

These are just a few of the factors we look for in a company's management. If you can find leaders who continually give shareholders high returns on their capital, and align their interests with yours, you've got a better chance to enjoy market-beating returns for the long haul.

Jeremy Phillips owns shares of no companies listed above. Google is a Motley Fool Inside Value pick. Baidu and Google are Motley Fool Rule Breakers recommendations. eBay is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a bull call spread position on eBay. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

This article was originally published as The One Thing to Know About Googleon Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

Meet the Cash Kings of Electronic Equipment

As an investor, it pays to follow the cash. If you figure out how a company moves its money, you might eventually find some of that cash flowing into your pockets.

In this series, we'll highlight three big dogs in an industry, and compare their "cash king margins" over time, trying to determine which has the greatest likelihood of putting cash back in your pocket.  After all, a company can pay dividends and buy back stock only after it's actually received cash -- not just when it books those accounting figments known as "profits."

The cash king margin
Looking at a company's cash flow statement can help you determine whether its free cash flow actually backs up its reported profit. Companies that can create 10% or more free cash flow from their revenue can be powerful compounding machines for your portfolio.

To find the cash king margin, divide the free cash flow from the cash flow statement by sales:

Cash king margin = Free cash flow / sales

Let's take Nike as an example. Over the last four quarters, the footwear giant generated $3.2 billion in operating cash flow. It invested about $335 million in property, plant, and equipment. To calculate free cash flow, subtract Nike's investment ($335 million) from its operating cash flow ($3.2 billion). That leaves us with $2.8 billion in free cash flow, which the company can save for future expenditures or distribute to shareholders.

Taking Nike's sales of $19 billion over the same period, we can figure that the company has a cash king margin of about 15% -- a nice high number. In other words, for every dollar of sales, Nike produces $0.15 in free cash.

Ideally, we'd like to see the cash king margin top 10%. The best blue chips can notch numbers greater than 20%, making them true cash dynamos. But some businesses, including many types of retailing, just can't sustain such margins.

We're also looking for companies that can consistently increase their margins over time, which indicates that their competitive position is improving. Erratic swings in margins could signal a deteriorating business, or perhaps some financial skullduggery; you'll have to dig deeper to discover the reason.

Three companies
Today, let's look at three companies in the electronic equipment space:

Company

Cash King Margin (TTM)

1 Year Ago

3 Years Ago

5 Years Ago

EMC (NYSE: EMC)

22.3%

20.4%

15.0%

20.0%

NCR (NYSE: NCR)

2.0%

5.3%

10.3%

6.3%

Hitachi (NYSE: HIT)

4.6%

-2.4%

-1.4%

-2.9%

Source: Capital IQ, a division of Standard & Poor's; TTM = trailing 12 months.

These three companies operate in diverse areas of the electronic equipment space. EMC has shown healthy cash king margins for years, and has tightened the ship recently after a dip a few years ago. NCR has seen its margins plummet, now sitting at just one-third of what they were a half-decade ago. Hitachi has gotten its head above water, through reduced capital investment and increased operating cash flow, but after years of negatives, I wonder how sustainable this positive burst is.

The cash king margin can help you find highly profitable businesses, but it should only be the start of your search. The ratio does have its limits, especially for fast-growing small businesses. Many such companies reinvest all of their cash flow into growing the business, leaving them little or no free cash -- but that doesn't necessarily make them poor investments. You'll need to look closer to determine exactly how a company is using its cash.

Still, if you can cut through the earnings headlines to follow the cash instead, you might be on the path toward seriously great investments.

The Motley Fool is buying 50 stocks in 50 days for its "11 O'clock Stock" series. For more information, click here . Then come back to Fool.com every single weekday at 11 a.m. ET for a brand-new pick!

This article was originally published as Meet the Cash Kings of Electronic Equipmenton Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

Why Smartphone Market Share Numbers Will Fool You

In the hype-filled world of the tech sector, there are lies, damned lies, and market share statistics.

No, the market share numbers themselves are mostly legit: Industry research firms such as Gartner , IDC, and Strategy Analytics put a lot of effortinto estimating unit shipments of PCs, cell phones, servers, and other kinds of tech hardware from leading manufacturers with a reasonable amount of accuracy. But those numbers often bear little relationship to a manufacturer's share of an industry's revenues, never mind its profits.

Nokia's strong market share ...
There's probably no better example of how deceptive industry market share can be when it comes to judging a company's financial strength than Nokia (NYSE: NOK) . If your opinion about the strength of Nokia's mobile phone business in recent years was based only on market share numbers, which are typically based on unit shipments, you'd probably think Nokia has been doing a pretty good jobof weathering the competitive challenge posed by Apple 's (Nasdaq: AAPL) iPhone, Research In Motion 's (Nasdaq: RIMM) BlackBerrys, and a variety of phone manufacturers relying on Google 's (Nasdaq: GOOG) Android. For the first quarter of 2010, IDC estimated that Nokia's share of global mobile phone shipments stood at a healthy 36.6%. That's only slightly below the 38.2% share IDC gave to Nokia for the whole of 2007, and actually above the 34.2% assigned to the company for 2006.

Meanwhile, though Nokia's share of the smartphone segment of the mobile phone market took a hit in 2008 -- a year in which iPhone and BlackBerry sales really took off -- market share numbers suggested that the company had been holding its ownin the following quarters. Research firm Canalys estimated that Nokia's share of global smartphone unit shipments in Q1 2010 amounted to 38.8%; this was roughly even with the 38.9% share Canalys estimated for Nokia for Q3 2008, and translated into 38% smartphone unit shipment growth for the company during this time frame.

... And slumping profits
But alas, those healthy market share numbers completely sidestep the fact that Nokia's mobile phone revenues in recent years didn't come close to keeping up with its unit shipments. From the first quarter of 2007 to the first quarter of 2010, the average selling price (ASP) for Nokia's phones fell more than 30%, from 89 euros to 62 euros, as its sales became increasingly slanted toward cheaper models targeting developing nations. And though Nokia has only recently begun breaking out its smartphone ASP, we know that, just between first quarter 2009 and 2010, this number fell by more than 18% to 155 euros -- less than half of the sky-high selling pricesreported for the iPhone and high-end Android devices such as the Motorola (NYSE: MOT) Droid X and HTC EVO 4G.

Thanks to this massive drop in ASPs, revenues for Nokia's "Devices & Services" division plummeted by more than 28% from first quarter 2008 to 2010. And in an industry where a disproportionate share of gross profitscome from sales of high-end smartphones and other costly devices, Nokia's ASP drop produced a stunning 57% fall in the division's operating profit during this time period.

From that angle, it becomes obvious that Nokia sure wasn't holding its ground in the mobile phone market in recent years -- and especially not in the pivotal smartphone segment. The performance of Nokia's stock price of late -- its shares are down over 60% during the past 24 months, compared with a drop of less than 10% for the Nasdaq -- show just what a huge mistake it would have been for investors to hold onto Nokia shares because its unit shipment share looked healthy.

Apple the profit-margin king
Just as cell phone market share numbers painted a rosy picture of Nokia's business, they didn't begin to do justice to the enormous profitsApple has raked in from iPhone sales from 2007 onwards. Though Steve Jobs & Co. still haven't joined the ranks of the world's top five phone manufacturers in terms of unit shipments, one recent study estimated that the iPhone's phenomenal ASPs and profit margins translated into Apple possessing 48% of the industry's earnings before interest and taxes (EBIT) during the second quarter of 2010.

Likewise, anyone relying on PC market share data to judge the strength of Apple's Mac business would also be selling the company short (figuratively, if not literally). With Mac sales historically skewed toward high-end computer buyers, Apple's PC ASPs and profit margins have long been well above industry averages. And over the past couple of years, this gap has grown even larger due to the fact that Apple has stayed out of the rapidly growing netbook market, choosing instead to offer the iPad as a netbook alternative.

Thus, while Apple's Mac sales account for little more than 4% of the PC industry's global unit shipments (based on the company's data and IDC), a report from Deutsche Bank estimated that Apple took in 35% of the industry's operating profit in 2009 -- easily outpacing unit shipment leaders Hewlett-Packard (NYSE: HPQ) and Dell (Nasdaq: DELL) , along with everyone else.

Of course, the huge returns delivered by Apple's shares in recent years have been ample proof of the company's status as a giant money-maker. But anyone who was judging Apple based on market share data from the likes of Gartner and IDC would have deemed it overhyped and overpriced, all the while deeming Nokia to be a screaming bargain.

That's as good an argument as any for why poring over market share data can be harmful to an investor's financial health -- at least when it's done without maintaining a healthy sense of perspective.

This article was originally published as Why Smartphone Market Share Numbers Will Fool Youon Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.