One of the cheapest stocks in our Small & Micro Cap Stock Screener is inTEST Corporation (NYSEMKT:INTT).
inTest Corp (inTest) is an independent designer, manufacturer and marketer of thermal, mechanical and electrical products that are used by semiconductor manufacturers in conjunction with ATE, in the testing of ICs.
A quick look at inTest’s share price history over the past twelve months shows that the price is up 100%, but here’s why the company remains undervalued.
The following data is from the company’s latest financial statements, dated June 2017.
The company’s latest balance sheet shows that inTest has $8 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has zero debt. Therefore, inTest has a net cash position of $8 Million (cash minus debt).
If we consider that inTest currently has a market cap of $78 Million, when we subtract the net cash totaling $8 Million that equates to an Enterprise Value of $70 Million.
If we move over to the company’s latest income statements we can see that inTest has approximately $10 Million* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 7.30, or 7.30 times operating earnings. That places inTest squarely in undervalued territory.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
A quick look at the company’s latest cash flow statements shows that inTest generated trailing twelve month operating cash flow of $7 Million and had $0 Million in Capex. That equates to $7 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 10%.
It’s also worth considering inTest’s annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $40 Million in equity for the quarter ending March 2017 and $42 Million for the quarter ending June 2017. If we divide that number by two we get average equity of $41 Million. If we consider that the company has $5.61 Million (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 14%.
Lastly, inTest’s current revenues of $51 Million (ttm) are an historical high as is its book value per share of $4 (ttm) and operating margins of 53% (ttm). The company’s net income of $5.61 Million (ttm) and free cash flow of $7 Million (ttm) are also five years highs.
In terms of inTest’s current valuation, the company is trading on a P/E of 13.7 compared to its 5Y average of 15.6**, a P/B of 1.9 compared to its 5Y average of 1.3**, and a P/S of 1.5 compared to its 5Y average of 1**. inTest has a FCF/EV Yield of 10% (ttm) and an Acquirer’s Multiple of 7.30, or 7.30 times operating earnings. The company has an annualized Return on Equity (ROE) for the quarter ending June 2017 of 14% (ttm) and remains financially sound with a Piotroski F-Score of 7, an Altman Z-Score of 5.25, and a Beneish M-Score of -0.67. All of which indicates that inTest remains undervalued.
** Morningstar
About The Small & Micro Cap Stock Screener (CAGR 22%)
Over a full sixteen-and-a-half year period from January 2, 1999 to July 26, 2016., the Small & Micro Cap stock screener generated a total return of 3,284 percent, or a compound growth rate (CAGR) of 22.0 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 265 percent, or 5.7 percent compound.
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