qualities of a cash cow

I have mentioned the term 'Cash Cow' in a number of posts and I note others like 'alecfra' have as well.

I still believe that many investors don't understand the long term benefits of taking a position in a Company that has what would appear to be a very high probability of generating very large profits from an extremely low cost base.

There are two major benefits in recognising this potential and investing in it.

1) Short-Medium term Capital Gain - With each additonal contract comes an expectation and realisation of additional profit generation. This in turn results in a market capital revaluation which should result in an increased share price.

So if ADO continue to sign deals with new clients then their profitability should just continue to increase and so should their share price.

The rate of this increase should simply reflect the rate/size of the deals ADO signs.

2) Long-Term dividend income - This can by far in away be the best result of investing early in a potential 'Cash Cow'.

Company's which generate large profits can either spend money to increase those profits, or return it to shareholder via way of a dividend.

So what could that mean for an emerging 'Cash Cow' such as ADO?

Well lets run some numbers.

Lets say someone invested $5,000 and purchased 50,000 ADO at $0.10.
- At $0.10 ADO would have a fully diluted market cap of $80million
- Based on a moderate (low end) PE ration of 10 ADO would only need to make $8million per year in profit to justify such a market cap.
- ADO would have the capacity to pay fully franked $0.007 dividend or $350 per year to the sharholder above.

Now lets shift a little further into the future - ADO realy starts to penetrate the market and now generates $80million in profits each year
- Once again at a moderate PE of times 10 - ADO's market cap should exceed $800million and therfore a share price of approximately $1.00
- ADO would have the capacity to pay fully franked $0.07 dividend or $3,500 per year to the sharholder above.
- The investors net capital gain at this point would be $45,000

Are you all starting to get the picture.

Variables to consider:
- Considering the PE ratio of 10 is extremely small for a cash cow of such proportions I would suggest the capital appreciation would be much much higher.
- If ADO's product is as superior as early indications would indicate, then the numbers I have used above will be blown out of the water. I truly believe profits of 100's of millions of dollars are a reality here.
- That being said it realy is quite possible that an investment of $5,000 now could return you more than $5,000 per year in fully franked dividends in the not to distant future
- This also preceeds the logical steps of share buybacks to reduce the capital structure and increase future divedend yields

Now 'alecfra' mentioned the word "takover" in his little blurb before. Cash Cows are take over targets for that very reason. They are a guaranteed revenue stream for the suitor.

So for those considering ADO as a short term investment, I seriously think you may want to look at what you could be giving away.

IMO
DYOR