Today I'm looking at two companies with very different businesses, but one thing in common -- they both generate a lot of cash. Is either stock a buy, following today's interim results?
A tasty dividend
Shares in casual dining chain The Restaurant Group (LSE: RTN) bounced 6% higher this morning after the group said it would close 33 underperforming restaurants.
The group -- which owns the Frankie & Benny's chain -- said that unsuccessful menu changes, poor customer service and a lack of value offers had led to a 3.9% fall in like-for-like revenues during the first half of the year.
Action is being taken to address these problems and win back the loyalty of families, the group's core customer base.
I bought shares in Restaurant Group earlier this year, because I was attracted to the firm's strong cash generation and generous dividend yield. This morning's results confirmed these attractions.
Adjusted earnings fell by 3% to 14.3p per share, suggesting that full-year forecasts of 28.7p remain realistic. Although operating profit fell by 4.4% to £37.5m, almost all of this was converted to free cash flow, which was £35.8m.
Using these figures, I estimate that Restaurant Group has an operating margin of about 10% and trades on a price/free cash flow ratio of 11.4.
These figures look attractive to me, alongside the stock's forecast P/E of 15 and prospective yield of 3.7%. However, the group does face headwinds from rising costs, which could slow its recovery.
After today's gains, I rate the shares as a hold.
Profits down, but still cashed up
Data centre and IT services group Computacenter (LSE: CCC) says that challenging conditions in the UK caused the group's adjusted pre-tax profits to fall by 10% to £25.3m during the first half of the year.
However, trading in Germany and France was strong, and the group's revenue rose by 2.6% to £1,478m over the period. Net cash rose by 115% to £96.6m and chief executive Mike Norris is confident that Computacenter "will finish the year with record levels of net funds."
The second half of the year is also expected to yield a better performance on profit. Mr Norris expects Computacenter to deliver a "modest" improvement in adjusted pre-tax profit this year over 2015.
Buy and hold?
Computacenter is a company I rate as a potential long-term buy-and-hold stock. The group generates very high levels of free cash flow and has delivered steady earnings and dividend growth for a number of years.
Today's results show that the firm has net cash worth about 78p per share. That's more than 10% of Computacenter's market value. The shares trade on 14 times forecast earnings for 2016, but if net cash is stripped out of this valuation then the business trades on a more modest 12.8 times forecast earnings.
Although Computacenter's forecast dividend yield is only 3%, it's backed by net cash and has risen by an average of 5% each year since 2010. For long-term shareholders, this has been a good income buy.
I expect Computacenter's dividend and earnings growth to continue, and rate the shares as a buy at current levels.
A 'special situation' for income investors?
The Motley Fool's experts have identified an income stock they believe could be significantly undervalued at current levels.
The nature of this business means it could experience a significant re-rating if trading improves, as our experts expect. I believe a takeover bid might also be possible.
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Roland Head owns shares of The Restaurant Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.