The headlines may be about earnings, but the smart money always pays closer attention to free cash flow.
Right now that can be a tricky metric because the less companies spend, the better free cash flow looks. And over the past year, cost cutting has been a way of life in corporate America.
Considering that companies can only cut so much, especially as the second quarter winds down, the trick in the next round of earnings will be to figure out whether this robust free cash flow is sustainable.
Free cash flow, generally defined as operating cash flow minus cap spending, is the holy grail of any company because it is cash that comes with no strings attached.
It can be used for anything discretionary, including such things as acquisitions, dividends, stock buybacks and paying down debt.
The research firm Cash Flow Analytics, founded by Georgia Tech accounting professor Charles Mulford, ran some numbers and the results may surprise you.
Among the most notable moves in the first quarter came from sectors that had been the laggards:
- Semiconductors and semi equipment, whose free cash flow margin (a metric devised by Cash Flow Analytics) not only reversed itself, but did so on a rise in median revenue and profitability.
- Media, whose free cash flow margin rose in the first quarter from the fourth quarter but (not surprisingly) remains below a year earlier. Much of that increase appears to largely be the result of cost-cutting.
- Telecommunications, whose cash flow margin was not only below the fourth quarter but a lower than a year earlier. Much of that decline, according to Mulford, is a result of lower profitability.
Here’s where it gets interesting, especially when trying to figure out which company is better managed:
AT&T’s free cash flow margin is tracking the industry fairly closely, with a free cash flow margin that continued a multi-quarter slide—down 3 percent from a year ago.