Last updated: 08:45 / Thursday, 19 May 2016
Analisys by MFS

Free Cash Flow Is King

Free Cash Flow Is King

Given the strength of the dollar — though it has weakened some of late — multinational companies have seen their earnings per share pressured. If you compare the EPS growth rate of US-focused companies with that of their multinationally focused counterparts, there is a very wide gap, points out MFS.

According to the firm, US-focused firms are dramatically outperforming their foreign-focused peers. Revenues, profits and margins are still growing, which is something skeptics would not expect in the seventh year of an economic expansion.

"And perhaps even more important than expanding profit margins are expanding free cash flow margins”, explains in its latest analysis.

“The free cash flow generation of large cap companies, if you strip out energy, materials and industrials, is running near all-time highs. For that reason our outlook for US equities remains strong compared to Japan, where Abenomics does not appear to be working well, and Europe, where labor costs remain persistently high and return on equity is subpar”, write the experts of the firm.

The United States has consistently generated post-dividend free cash flow margins that have exceeded every other region of the world. The composition of the US market — with its emphasis on technology companies and companies that use technology to increase efficiency, its rapid asset turnover and low capital intensity ratio and its use of capital outside the US’s borders as large cap companies globalize — lends itself to robust cash flows that should reward equity investors in 2016, said MFS´ experts.

MFS highlights that in an environment where it exists the possibility of somewhat looser global financial conditions for the foreseeable future, the asset manager is generally more constructive toward higher-risk assets. Equities and high yield debt should be a focus for investors looking to re-risk portfolios, and strong fundamental, bottom-up analysis is critical to that re-risking process.

“Free cash flow generation, which is not a Fed-driven phenomenon, remains the key, and we see that most clearly in US markets”, concludes MFS.