Cash Is King

In today’s financial markets, one four-letter word matters more than any other: cash.

In most years, the markets reward companies for growth. Not now. Today, there is a new mantra: liquidity—cash and cash flow. Because companies with enough cash will not only survive but should thrive when the inevitable upturn comes.

Tom Kamp has managed money for almost two decades, currently as the chief investment officer at Cornerstone Capital Management in Bloomington. Characterizing overall market conditions in an October letter to clients, he called it an “environment of extreme pessimism and fear.”

Kamp is buying stocks “where the companies have strong balance sheets to weather a tough liquidity environment for the next six to nine months.” He’s probing such details as a company’s debt distribution—for example, how soon does a given tranche of debt come due? Can a firm sell new commercial paper (a short-term debt instrument) to pay off existing commercial paper as it comes due?

Wanted: Cash Czar

All companies are responding to this new reality. For instance, H. J. Heinz Company (NYSE: HNZ), the Pittsburgh-based food company, announced in November that it was elevating the importance of cash by creating a new high-level “cash czar” position. Also in November, Target Corporation of Minneapolis (NYSE: TGT) announced that it would hold on to more of its cash by suspending its stock buyback program. And for companies around the globe, the unending rat-a-tat of layoffs is motivated by a single imperative—the need to save cash.

Eden Prairie–based ADC Telecommunications (Nasdaq: ADCT) trumpeted its cash position in December: “Perhaps our most important accomplishment in 2008 was our ability to further strengthen the company’s balance sheet. We generated very positive cash flows and finished the year with a strong liquidity position that will serve us well in these uncertain times.”

Nationally, reports indicate that as much as $800 billion of corporate debt is coming due next year. Companies will need to refinance (or roll over) that debt with new debt or, if markets permit, equity.

“A boat that is too full of debt doesn’t move very well in these tough seas,” says David Hust, chairman of Tealwood Asset Management, a Minneapolis asset management firm. The analysts at his firm are more focused than ever on net cash—that is, cash on the left hand side of the balance sheet minus debt on the right.

Another local example of the importance of cash is Hutchinson Technology, Inc. (Nasdaq: HTCH), a maker of disk-drive components in Hutchinson. The company announced work force cuts of 20 to 25 percent in December, stressing that it was “aggressively managing our cost structure and cash position to ensure that we will meet our obligations.”