Posted 2/17/2011 7:14:30 AM by FSS

While consumers may be struggling to keep cash in the bank, companies are flush with it these days. In fact, non-financial companies in the United States have nearly $2 trillion sitting in cash. That’s a serious amount of dough.

Time to Put that Money to Work

During the financial panic, it made sense for companies to stash cash as a defensive position. As the economy continues to improve, however, the question now becomes – what will these companies do with all that cash? With money market funds and Treasury bills paying paltry returns for the foreseeable future, businesses need to find other places to put their money to work.

There are plenty of choices. Companies could spend that cash reinvesting in current operations, acquiring other firms, or through capital spending – investing in projects in hopes of earning high rates of return. Another option would be to distribute excess cash to shareholders through higher dividend payments. Or, the company could invest in itself; that is,buy back shares

Investing in Themselves

When a company announces a stock buyback, it’s a powerful signal to investors that management is confident in the long-term outlook of the company and that the share price is fundamentally undervalued. A common theme throughout most share repurchase announcements reads something like:

‘We feel the best use of our cash was to invest in ourselves.’ Or, ‘We believe the market has significantly undervalued our stock.’

While this may be the case, corporate executives usually aren’t ones lacking in confidence, and most will tell you that their company’s stock is undervalued.

Here is one company doing just that:

Herbalife announced on May 3, 2010 that it was authorized to spend up to $700 million buying back shares through the end of 2014. This represents a whopping 23.8% of total shares outstanding. The company has spent $106 million in the first nine months of 2010 repurchasing shares.

That’s one way to grow EPS.

The other way is to grow earnings, which it has been doing quite well lately. In the third quarter of 2010, Herbalife reported a 31% increase in net income year-over-year on 15% sales growth. Management also raised its guidance for the remainder of 2010 following the strong quarter. Analysts expect the company to grow EPS 40% in 2010 and 15% in 2011. It is a Zacks #2 Rank (Buy).

The valuation picture looks attractive too. Shares trade at 13.0x forward earnings, a discount to the industry average of 17.4x. Its PEG ratio is 1.0.

Herbalife is a global network marketing company offering a range of science-based weight management products, nutritional supplements and personal care products intended to support weight loss and a healthy lifestyle.

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