Small And Micro Cap Screener Bonanza: $ENZN, $SINO, and $WILC

Brodie HinkleStocks2 Comments

Brodie Hinkle, a senior at the University of Oklahoma, is a contributor to the Acquirer’s Multiple. Brodie is a double major of finance and energy management. He will be periodically writing opinionated articles about individual companies that show up on the stock screeners. If you’d like to contribute an article, please contact me at Contributors receive complimentary access to the screeners.

Today I would like to do a lightning round to touch on the top 3 ranked Micro/Small Cap stocks according to Tobias Carlisle’s screener on Little known information can generally be found on each stock of this particular capitalization window, therefore, I have taken the initiative to dig into these company’s’ financials and search for untapped growth opportunities. My final goal is to educate and provide illustrations as to how these companies generate their revenue, as well as, what makes them unique to their industry.

First, Enzon Pharmaceuticals Inc. (ENZN) is a $42.9 million capitalization company that generates revenues through the sales of four main drugs: PegIntron®, Sylatron®, Macugen® and CIMZIA®. All of Enzon’s products have the general theme of combating life-threatening viruses, cancerous agents, and various forms of arthritis. Enzon’s largest revenues come from their product, PegIntron®, which is marketed by the pharmaceutical powerhouse, Merck & Company. Prior to 2013, ENZN spent much time, effort, and capital to generate high-quality drugs through their R&D Department.   Enzon believes the creation of their four primary drugs has created a healthy stream of revenues for the foreseeable future, in which they are not currently working on any further products and do not plan to do so for now. From an investment standpoint, I see this as both a strength and weakness. Due to the elimination of R&D efforts, all operating expenses are at a minimum, which makes ENZN an efficient company that is sitting on streams of royalty revenue. In contrast, it is alarming that ENZN is not working to expand their product base in order to create larger streams of revenue. As a $42.9 million capitalization company, Enzon has a ton of room for growth and expansion if they were to fixate their efforts on creating more value for the company. From a financial standpoint, ENZN is generating very fat returns, with a P/E of 1.8, in comparison to the industry average of 35.5. Their P/B is 2.4, in comparison to the industry average of 7.6. Furthermore, ENZN’s D/E is 0.167. In conclusion, Enzon essentially keeps every dollar they earn from sales. Of the $31 million in revenue they collected last year, $29 million went into retained earnings. ENZN is a relatively simple company and we see them as a viable option for investment for the foreseeable future.

Second, Sino-Global Shipping America, Ltd (SINO) is a $6.9 million corporation with most recent annual sales reaching $11 million for the year ending June of 2015. Sino-Global is a shipping agency, which offers logistics and ship management services. Their most viable services include shipping agency services, shipping and chartering, inland transportation management, and ship management services. The bulk of SINO’s revenues are derived from clients located in the People’s Republic of China and Hong Kong. Recently, SINO acquired Longhe Ship Management, a ship management company based in Hong Kong. Sino-Global has steadily increased their profitability and efficiency in recent years. Furthermore, SINO’s total assets and equity have consistently increased, providing shareholders with more value. A few prevalent risks come to surface when viewing SINO’s financials. The company’s size, $6.9 million, is of concern for both volatility and liquidity purposes. If a large investor were to purchase/sell large lump sums of SINO shares, it would be of prudent practice to use a limit order on the transaction. Also, it is of concern that SINO’s revenues have dwindled over time. We would like to see Sino-Global revamp their sales program to build clientele so that shareholders could reap the rewards from revenue growth. SINO has a current P/E of 7.4, which is a strong return in relation to its peers P/E of 25.8. Furthermore, Sino-Global has a P/B of 0.5, compared to the industry average of 5.5. Overall, SINO is a risky play, but we could see this company turn operations around to create profitable opportunities for shareholders.

Lastly, G Willi-Food International Ltd (WILC) is a $58.9 million capitalization company with annual revenues of $329 million. WILC develops, imports, exports, markets and distributes food products. G Willi-Food specializes in food products consisting of canned vegetables, packaged fruits, pickled vegetables, pasta, and cooking oils. G Willi-Foods is most popular in Asia, but has indeed penetrated into the American markets. For instance, G Willi-Food owns the brand Del Monte, which is a major supplier of canned fruits and vegetables. WILC owns 14 very strong brands that effectively pierce into global markets, providing canned food to numerous consumers. From an investment standpoint, it is very attractive to see this company expanding its reach throughout global markets, which develops widespread opportunities that result in continued growth. WILC has done a fantastic job increasing both asset and equity totals for shareholders. They currently possess a P/E ratio of 23.3, which is strong in comparison to the industry average of 29.8. Also, WILC’s P/B ratio is 0.6 in comparison to the industry average of 3.3. We see G Willi-Food as a strong candidate for investment due to its global presence and strong brands. Throughout all stages of the economic cycles, we see WILC continuing to generate strong sales due to their particular position within the industry. As is a theme in the micro/small capitalization stocks, we see risks deriving from the particular size of WILC, but in conclusion we see fantastic opportunity for investment.

In conclusion, we see Enzon, Sino-Global, and G Willi-Food as great candidates for investment. Tobias Carlisle has done a fantastic job laying out the foundation of quant value investing through means of the Acquirer’s Multiple, and these three positions illustrate compelling opportunities in compliance to Tobias’ benchmarks. We would like to forewarn all investors that the micro/small capitalization sector of stocks will endure volatile market swings. Therefore, investors must thoroughly understand ones risk tolerance prior to executing positions into this market capitalization sector.


Micron Technology, Inc. ($MU): Cheap and a Takeover Target

Tobias CarlisleStocks9 Comments

I love it when I get the chance to write about a high-profile stock, particularly when it’s owned by David Einhorn–one of the smartest guys around–and it’s dirt cheap. Poor old Micron Technology, Inc. ($MU). I’ve bought and sold it so many times over the last decade. It was a net net in 2009 before running away. It got cheap on an acquirer’s multiple basis (and close to net net territory) in 2011 and again in 2012 before running away. And here we are again. It’s cheaper now than it has been at any time in the last two years, down 60 percent (!) from its 52-week high, and 8 percent from its 52-week low.

At the time of writing MU’s trading at $14.56, putting it on a market cap of $15.7 billion. Add in the $3.6 billion of net debt and its enterprise multiple swells to $19.3 billion. On trailing twelve month operating earnings of $3.4 billion, it trades on an acquirer’s multiple of just 5.7x. It’s cheap on other measures too: The PE ratio is a paltry 5, and free cash flow / enterprise value yield is 11 percent. It’s a net issuer of stock to the tune of 2 percent over the last twelve months, and doesn’t pay a dividend, both of which are less than ideal.

Micron Technology, Inc., founded in 1978 and is headquartered in Boise, Idaho, manufactures semiconductors. The company sells dynamic random access memory (DRAM), NAND flash, and NOR flash memory products; and packaging solutions and semiconductor systems. It operates in four segments: Compute and Networking Business Unit, Mobile Business Unit, Storage Business Unit, and Embedded Business Unit. MU markets its products to original equipment manufacturers and retailers.

MU’s a reasonably safe company, scoring well on the Z, F and M scores–the statistical measures I like to examine to detect fundamental strength, financial distress, and earnings manipulation respectively. MU scores worst on its Altman Z-Score. At 2.43, it is in the grey zone, which means it is not financially distressed (below 1.81), but neither is its clearly safe (above 2.99). MU has seemed to flit between distressed and safe over the last decade with no appreciable damage, but it’s worth watching. Its Piotroski F-Score is 6 of 9, which indicates fundamental stability. Its Beneish M-Score of  -2.68 indicates the company is not an earnings manipulator (less than -2.22 is not a manipulator). Taken together, MU is in reasonably good shape, but its debt load and financial distress grey zone mean that its safety isn’t unalloyed.

It has an unusually smart collection of investors as shareholders, all of whom are buying hand over fist. David Einhorn, Joel Greenblatt, David Dreman, and First Eagle have all added to existing positions in the last 6 months. Einhorn, in particular, has been vocal about MU’s prospects, writing in his July 2015 investor letter that MU–then trading at ~$19, or $20 billion market cap–would be worth more than Netflix at $40 billion (which is also a comment on NFLX’s overvaluation):

Most companies are still held accountable to current performance. Micron Technology (MU), which fell from $27.13 to $18.84 during the quarter, was our biggest loser. It’s a cyclical business and, regrettably, we missed the turn of the cycle. Long production lead times make it difficult to match supply with demand, and when demand falls short (as it has recently), shortages can turn into surpluses. Prices (and profits) fell, and MU disappointed. MU also had manufacturing problems that will impact earnings for the next couple of quarters.

With only three remaining players, the industry is behaving more rationally. Manufacturers are redirecting capacity away from computer DRAM to other segments, and we believe that the excess computer DRAM inventory created earlier this year is now being absorbed. Our assessment is that MU shares have fallen too far. Peak quarterly earnings last year were $1.04 and we expect the cyclical trough to be around $0.40 in the August quarter. At $18.84, the company trades at less than 12x annualized trough earnings and less than 5x prior peak earnings. We expect future cycles will have higher peaks and higher troughs, as the technology story for both DRAM and NAND (including 3D memory) is bright for the next several years.

Our long-term outlook is that sometime in the next few years, MU (currently valued at $20 billion with $3.7 billion of trailing net income) will be worth more than NFLX (currently valued at $40 billion with $240 million of trailing net income). It’s a contrarian view, but we don’t think the movie is over.

MU has also attracted attention from a potential suitor in China’s Tsinghua Unigroup. China is the world’s largest semiconductor consumer, accounting for almost half of computer chip demand (for domestic and export markets) and has to import 90 percent of its integrated circuits. It has been reported that Zhao Weiguo, president of Tsinghua Unigroup, has already met Micron’s board members to gauge the feasibility of an acquisition with U.S. authorities:

Should it be rejected on national security grounds, as noted by Senator John McCain, Tsinghua could still ally with Micron to enable it to develop its sales in China while negotiating a production on Chinese soil of flash memory drives and other devices.

The rumors are that if Tsinghua were to acquire Micron, it would pay some $21.0 billion. Micron has suffered over the past two years for the first time due to weaker demand for dynamic random access memory (DRAM) chips used in PCs. But it now has the new technology to benefit from the smartphone market as well as servers and other chips used as storage on mobile devices and computers.

MU is imperfect. It carries a substantial slug of debt, is in a financial grey zone, doesn’t pay a dividend, and it’s a net issuer of stock. But it’s also very cheap, trading on an acquirer’s multiple of 5.7x, a PE of 5 and a FCF/EV yield of 11 percent. Einhorn makes mistakes, but he’s one of the smartest investors around and he’s very tenacious. MU announces earnings after the close today. I don’t know, but I’d guess that anything less than a disaster will be viewed very positively.

Long/short equity, event-driven, activist, research analyst Scott Tzu at  likes it too. Here’s his take:

We believe the semiconductor sector is bottoming, and we believe that stabilization of the sector will result in the company taking on as much as 50% upside from these levels. We also believe that genuine buyout interest in the company continues to exist at these compressed multiples.

The company is going to be reporting next week, and we’re likely to get a firsthand look at why quantitative investors are drawn to Micron. The company is expected to post earnings of $0.35 on revenue of $3.567 billion.

For the full year, the company is expected to earn $2.68 and even for next year, the company is expected to earn $2.20. Despite the EPS decline, Micron still remains attractively valued from a fundamental basis.

MU PE Ratio (Forward) Chart

MU PE Ratio (Forward) data by YCharts

In addition to the earnings, the company’s balance sheet continues to get better and better. Management is setting up the company to withstand these types of ebbs and flows in the sector by building a company that’s rich in assets and resources and isn’t leveraged too far.

MU Shareholders Equity (Quarterly) Chart

MU Shareholders Equity (Quarterly) data by YCharts

The company now has a book value of $11.59 per share, with $4.8 billion in cash in the bank versus the $7.6 billion in debt that the company is carrying. The company has done about $5.5 billion in operating cash flow over the ttm period and it continues to generate, and then stock away, cash.

MU EV to EBITDA (<a href=

MU EV to EBITDA (TTM) data by YCharts

From a valuation standpoint, the company is extraordinarily cheap. With a trailing 5.5x EPS and a forward EPS of 7.5x, it’s a race to try and buy cheap versus timing the decline and bottom of the semiconductor industry.

We continue to think the company’s EV/sales of 1.2x and EV/EBITDA make it an attractive buyout candidate.

You have to assume that there is genuine interest in buying out the company. The potential buyers of the Tsinghua group are legitimate buyers that have shown enough interest in buying the company to make a trip to the United States in order to discuss it. This is a question of whether or not the company’s valuation is going to get low enough for people to buy the company while the market continues to be in decline.


Read more: Many Reasons To Like Micron

Applying Deep Value Investing with The Investors Podcast

Tobias CarlisleStudyLeave a Comment

I had great fun chatting to Stig Brodersen about deep value investing and the acquirer’s multiple. We cover a lot of ground.

Get a free list of deep value stocks likely to be targets on The Acquirer’s Multiple.

Buy my book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Here’s your book for the fall if you’re on global Wall Street. Tobias Carlisle has hit a home run deep over left field. It’s an incredibly smart, dense, 213 pages on how to not lose money in the market. It’s your Autumn smart read. –Tom Keene, Bloomberg’s Editor-At-Large, Bloomberg Surveillance, September 9, 2014.

Click here if you’d like to read more on Deep Value, or connect with me on Twitter, LinkedIn or Facebook. Check out the best deep value stocks in the largest 1000 names for free on The Acquirer’s Multiple.

A Superior Valuation Metric: Enterprise Value (EV) to EBITDA | Wall Street Daily

Tobias CarlisleStudy3 Comments

Interesting post out of Wall Street Daily on the efficacy of the acquirer’s multiple by Alan Gula, CFA:

The price-to-earnings (P/E) ratio is perhaps the most popular valuation metric used by investors.

Pull up any finance website stock quote page, and you’ll find the P/E ratio neatly calculated for you.

The reason it’s so widely used is because it’s simple and intuitive.

You take the price of a stock and divide it by either trailing or forward (estimated) earnings per share (EPS). The lower the resulting figure, the better the valuation, all else equal.

But the P/E ratio has some significant flaws.

One of its biggest weaknesses is that it ignores the level of debt on a company’s balance sheet.

This is critical right now because so many companies are issuing debt to buy back stock or acquire other firms.

Now, there is a better metric we can use to assess a firm’s total valuation – not just its equity component.

It’s a bit more complicated, but as you’ll see, a little extra work is definitely worth the effort.

Think Like a Corporate Raider

The valuation metric I’m referring to is the enterprise value-to-EBITDA ratio.

Enterprise value (EV) is calculated in the following way:

EV = Market Cap + Total Debt + Preferred Stock + Minority Interest – Cash

This gives us a theoretical takeover value, which is similar to how an investment banker might value the company.

The denominator of the ratio is EBITDA, which stands for earnings before interest, taxes, depreciation and amortization. Basically, it’s the earnings that are available to all stakeholders.

Similar to the P/E ratio, a lower EV/EBITDA represents a cheaper valuation, all else equal.

Luckily, the EV/trailing EBITDA ratio can be found on the Yahoo! Finance Key Statistics page, so we don’t have to dig through financial statements.

Now for the payoff…

The Golden Ratio

The EV/EBITDA ratio could be the single-best valuation metric around.

Academic research has shown that stock selection based on EV/EBITDA outperforms P/E and price-to-book value methodologies on a risk-adjusted basis.

Using a Bloomberg backtest, we can see how a simple strategy based on low EV/EBITDA would have performed in the past.

Each quarter, S&P 500 companies with EV/EBITDA ratios ranking in the lowest 10% are placed into the Low EV/EBITDA Composite, which is market cap weighted just like the S&P 500.

So what happens when you invest in just these companies with low EV/EBITDA ratios?

Well, the remarkable results can be seen below:

With a return of 2,227% over the past 20 years, this strategy has simply blown away the S&P 500.

Cheap companies outperform over time, plain and simple.

If you haven’t been using EV/EBITDA as a guide, now is a great time to go through your portfolio and look up this crucial metric for each of your stocks.

The median EV/EBITDA ratio for the S&P 500 is currently 11.4x. If we own a stock with a much higher multiple, there better be a really good reason.

Of course, the ultimate goal is to select stocks with both low EV/EBITDA ratios and high dividend growth. Now that’s the basis for a powerful strategy and the key to an early retirement!

Source: A Superior Valuation Metric: Enterprise Value (EV) to EBITDA | Wall Street Daily

LG Display Co Ltd. (ADR) Trading Below Break-Up Value $LPL

Tobias CarlisleStocksLeave a Comment

Lg Oled Eg

LG Display Co Ltd. (ADR) $LPL is another super cheap company in the All Investable Screener offering substantial upside. The stock has been beaten up over the last twelve months, falling almost 50 percent from its 52-week high of $18.43. At its $9.64 price at the time of writing, the stock has a market capitalization of $6.9 billion. Its net debt to the tune of $1.7 billion pumps up its enterprise value to $8.6 billion. With operating earnings over the last twelve months of $2.1 billion, LPL trades on a very modest acquirer’s multiple of 4.13x. With a PE of 5.46, a free cash flow / enterprise value yield of 10 percent, and a 2.2 percent dividend yield, LPL is cheap across the board, and worthy of a closer look.

LG Display Co., Ltd., founded in 1985 and is headquartered in Seoul, South Korea, manufactures and sells thin film transistor liquid crystal display (TFT-LCD) panels in Korea, the U.S., Europe, and Asia. It offers various display panels comprising large-sized panels for use in televisions, notebook computers, and desktop monitors; and small-sized panels for other application products, such as mobile phones and tablet computers. The company also provides panels for industrial and other applications, including entertainment systems, automotive displays, portable navigation devices, and medical diagnostic equipment, as well as organic light emitting diode panels and flexible display products. LPL sells its products directly to end-brand customers and their system integrators. The company was formerly known as LG.Philips LCD Co., Ltd. and changed its name to LG Display Co., Ltd. in February 2008.

LPL is a safe stock on the metrics I favor. Its F-Score, which examines its fundamental strength, is a perfect 9. Its Z-score, at 2.76, puts it in the grey zone, which is appropriate given its debt load, but it is close to the >2.99, which would indicate an absence of financial distress (a Z-score below 1.81 indicates financial distress). Its M-Score, which measures earnings manipulation, is a healthy -2.99.

A month ago LPL announced a plan to shell out KRW 10 trillion (around $8.5 billion) through 2018 for the manufacture of OLED displays. Given LPL’s size, this is a very significant investment. OLED materials are a self-emitting light source, which means that OLED TVs, in particular, can be made incredibly thin, flexible, and even semi-transparent, all while offering unrivaled picture quality and virtually infinite contrast. From the same article:

Vaunted as the next-gen display technology, OLED boasts of improved brightness, contrast and efficiency as compared to LCD or Plasma. However, OLED is said to highly expensive to be used for manufacturing TVs and thus Samsung Electronics Co. Ltd. SSNLF – the TV maker giant – reduced its exposure to OLED TVs way back.

Presently, LG display and its sister concern LG Electronics are the only major players that are carrying the technology for TVs on their strong shoulders amid improving OLED market prospects. As per IHS DisplaySearch, a global market research firm, the flexible OLED market is expected to thrive from 2015, with projected sales to increase to $4.8 billion by 2021 from $3.5 billion in 2015. We believe on the back of such vigorous and dedicated efforts, LG Display can break all odds and emerge as a leader in the OLED market.

The Fool thinks the deal is a good one for LPL despite the fact that it’s likely a near-term money loser:

The (money losing) question
But that also raises the question: Why is LG Display willing to strike such a seemingly sour deal with its Chinese counterparts? It’s all about jump-starting demand for the OLED TV market, which LG Display views as the future of display technology and wants to ensure it continues to lead.

In addition, these imminent agreements with Chinese display manufacturers were a long time in coming. As The Wall Street Journalsuggested in February, affiliate LG Electronics was still “virtually alone in the global market for TVs using OLED technology,” so had been planning for some time to forge agreements with “select Japanese and Chinese companies.”

To be fair, however, just last week Panasonic unveiled its own curved 65″ OLED television, and recent reports suggest Samsung — which effectively shelved its large OLED panel development following manufacturing challenges last year — remains committed and will reenter the OLED TV market by 2017.

But for now, the primary problem is one of manufacturing capacity and, therefore, prohibitively high prices for OLED TVs. LG’s latest 55″ curved OLED television (pictured above), for example, currently sports a suggested retail price of $5,000. Though older models sell for considerably less, that’s hardly competitive in many consumers’ eyes.

The solutions
Speaking in a WSJ interview in April, Dr. Sang-Beom Han offered another pre-emptive look with a compelling explanation that so happens to speak to the most recent reports:

Because of the small capacity, there are limitations in the number of OLED TV panels we can produce. We have to ultimately reach economy of scale but we’re not there yet. This isn’t something that a panel maker can do single-handedly. Participation from multiple players is needed for addressing problems like cost reduction and product competitiveness. I believe other panel-makers are working on developing OLED panels as well. It’s just a matter of time before competitors jump in.

LG Display is also working hard to expand its OLED manufacturing capabilities and increase production yields. In addition to more than tripling production at its current Gen-8 OLED manufacturing line by the end of this year, just last month LG Display announced it will invest a whopping 10 trillion won, or $8.5 billion, to shift LCD manufacturing operations to OLED over the next three years.

Bernstein writes in Barron’s that they like the entire sector:

We believe we are now trawling along the trough of the crystal cycle, which will likely lead to industry moves to constrain supply, triggering a moderation of panel price declines, and an upward rerating of the stocks. We therefore take a more “constructive” view and upgrade our coverage to Outperform. To be clear, we are not saying “this time is different”, and that we’re structurally more positive on the sector. Far from it. But the conditions for a long trade on some inexpensive stocks seem to be coalescing.

We are now expecting companies to react to weakened industry conditions by cutting back utilization rates and begin moderating the rate of supply growth in Q4 2015 and into 2016.

– It is worth noting that both AUO and LGD mentioned during their recent earnings conference that they will adjust utilization rates according to market demand, which is a rare and cautious tone from the companies. As we highlighted in our previous work, panel makers are usually unwilling to be the first to cut utilization rates than competitors. Management’s comment on utilization indicates that the industry sentiment is likely at the bottom.

– Current stock valuations imply that LGD, AUO, and Innolux will report net margins of -5.8%, -7.7%, and -7.6% in 2016 respectively, which would mean EBITDA margin compression of ~10 percentage points from current levels. This is close to 2011 trough levels when the industry was at utilization rate of 60-70% (vs. currently ~85-90%). Given recent cycle trough margin compression trends, we think this is too pessimistic, and believe further de-rating of the stocks to be unlikely.

The thin-film-transistor liquid-crystal display (TFT-LCD) stocks in our coverage have rerated downward well below our breakup value-estimated target prices. Hence, we upgrade LGD, AUO, and Innolux to Outperform. Given the uncertainty on the timing and strength of the ASP catalyst, we retain our current target prices for all three companies.

– LG Display’s valuation has de-rated the earliest since the beginning of 2015, from above 1.1x P/BV to currently below 0.6x P/BV. We had recently upgraded the company to Market-Perform. However since then the stock price declined to well below what we believe to be the “breakup” value, and is now materially undervalued.

We believe we are at the bottom of the crystal cycle and the stocks are more than incorporating expectations for a terrible Q4 2015 and an overall weak 2016. Hence, there is sufficient margin of safety between current valuations and our target multiples to upgrade the stocks now. We do acknowledge that there is some risk on the timing of when the “price moderation” catalyst kicks in and how quickly it leads to more positive investor sentiment.

Investment Conclusion

We upgrade LG Display to Outperform, while maintaining our Target Price of KRW 28,000 ($13.18 for the ADR LPL), as we believe the stock is currently undervalued relative to our trough multiple valuation. LG Display usually has the highest valuation and re-rates first, given its liquidity, investor focus, financial strength, and capability for technological improvement that peers are unable to replicate.


Contributor Analysis: Western Refining Inc. (WNR)

Brodie HinkleStocks3 Comments

Brodie Hinkle, a senior at the University of Oklahoma, is a contributor to the Acquirer’s Multiple. Brodie is a double major of finance and energy management. He will be periodically writing opinionated articles about individual companies that show up on the stock screeners. If you’d like to contribute an article, please contact me at Contributors receive complimentary access to the screeners.

When researching the Large Cap 1000 Screener on the Acquirer’s Multiple website (, you will see Western Refining Inc. (WNR) as a top pick according to the value metrics laid out by Tobias Carlisle. Western Refining is a small oil and gas refiner in relation to domestic peers, having only two refineries. Western Refining operates their two refineries at full capacity, processing 151 mbbl per day. WNR also owns a 38.7% stake in Northern Tier Energy, which operates a refinery in Minnesota. At current, we see several compelling objectives that make Western Refining a prospect for investment.

First, WNR is geographically competitively positioned, which results in wide margins. As initially stated, WNR has a refinery in close proximity to the Permian Basin. Therefore, Western will obtain wider margins due to the decrease in transportation costs from field to refinery. According to Morningstar, Western Refinery benefits by $5 to $6 per barrel due to the transportation savings. Furthermore, the Permian is one of the best producing plays domestically, which oversaturates the supply for its region, as well as, worldwide. Furthermore, the Permian has shown staggering production growth year over year on a field-wide basis. According to the EIA, the Permian Basin is currently producing about 2 million barrels per day, in comparison to 800,000 barrels per day in 2007. As the Permian continues to increase production, pipeline infrastructure, and logistics technology, we estimate climbing revenues for WNR in response. Moreover, Western Refining will conclusively receive raw crude at a discount in relation to the current spot price on WTI. Also previously stated, WNR owns a large stake in Northern Tier (NTI), a variable distribution MLP in Minnesota. The refinery is built to cultivate both domestic light crude, as well as, Canadian heavy crude. NTI’s refinery currently processes an average of 89.5 mbbl per day. It is a probability that Western Refining will enhance the productivity of their refineries through enabling variable grades of crude. Bottom line, Western Refining is very well positioned geographically, and will continue to receive discount crude at full capacity throughout the foreseeable long-term horizon.

Second, raw quantitative figures for WNR are stunningly impressive. For example, Western Refining is currently operating at a 20% return on capital due to their sustained feedstock from the Permian and Canada. As WNR reinvests retained earnings into new projects, we expect to see Western Refining’s ROC ever increasing. Greater margins will be employed through the implementation of new logistics projects, which cut down on transportation costs. Furthermore, we expect to see an expansion of allowable capacity into current refineries operated by WNR. A boost in capacity would be a relatively inexpensive investment and would drive revenues higher. Likewise, WNR has a P/E of 8.1, which is a positive indicator of value since WNR’s 5-year average P/E is 16.6. WNR also has a dividend yield of 2.9%, which is slightly above the average S&P dividend yield of 2.3%.

Conversely, it is prudent advisory to understand the underlying risks that Western Refining may face in the foreseeable future. There are two primary risks that could inhibit future revenues: commodity pricing and adverse weather conditions. Although Western Refining is currently benefitting from the oversupply of crude in the Permian, there is always the possibly of supply racing back to meet demand. If demand would happen to overrun supply, Western Refining will tighten margins in the event due to competitive bidding campaigns amongst producers and refiners. Additionally, adverse weather conditions, such as hurricanes, may inhibit affected refineries from potentially operating for a period of time. Anytime severe weather is expected within the general area of a refinery, it is a safety standard to shut down the site due to precautionary purposes. We must also include the risk of future approval for crude exports. A lift on exports would increase refining competition, resulting in condensed margins. Lastly, as the legislation is always tightening environmental emission tolerances, there is the possibility of further tightening of carbon dioxide emission tolerances. Carbon dioxide is a byproduct of refineries; therefore, a tightening of tolerances would increase expenses for Western Refining.

In conclusion, we view WNR strategically placed as a buy for our portfolio. Western Refining’s strengths outweigh all current weaknesses, which offers a statistically viable opportunity for investment. The long-term prospectus of WRN appears favorable due to all reasons mentioned above. Lastly, Morningstar is valuing WRN at $50 per share, which calculates to an 11% premium to the current market price of $45.00.

Valero Energy Corporation, Does Buffett Buying Phillips 66 Make A Bigger Bargain $VLO

Tobias CarlisleStocksLeave a Comment

At $61.69, Valero Energy Corporation (NYSE:VLO) is a particularly cheap large capitalization stock, trading on an acquirer’s multiple of 4.68x. It’s market capitalization is $30.8 billion, and its net debt position at $2.1 billion gives it an enterprise value of $33.0 billion. In the last twelve months it generated operating income of $7.0 billion. It has generated a fat free cash flow on enterprise value yield of 12 percent, and has put that to good use, buying back 5.7 percent of its stock, and paying a 2.2 percent dividend yield for a total shareholder yield of 7.9 percent. VLO scores well on its F, Z, and M scores: F-Score: 7 (fundamentally strong), Z-Score: 4.39 (not in financial distress), M-Score: -3.23 (not a manipulator). We’ve covered it a few times here. The space is getting some love from Warren Buffett, who recently bought another 3.51 million shares in Phillips 66 (PSX) to bring his total to 61.5 million shares: 11.4 percent of the company.

VLO was founded in 1955 and is based in San Antonio, Texas (It was formerly known as Valero Refining and Marketing Company and changed its name to Valero Energy Corporation in August 1997). It’s an independent petroleum refining and marketing company in the United States, Canada, the Caribbean, the United Kingdom, and Ireland. It operates through two segments, Refining and Ethanol. The Refining segment is involved in refining, wholesale marketing, product supply and distribution, and transportation operations. This segment produces conventional and premium gasolines, gasoline meeting the specifications of the California Air Resources Board (CARB), reformulated gasoline blendstock for oxygenate blending, diesel fuels, low-sulfur and ultra-low-sulfur diesel fuels, CARB diesel fuel, distillates, jet fuels, asphalts, petrochemicals, lubricants, and other refined products. The Ethanol segment produces and sells ethanol and distillers grains. The company markets its refined products through bulk and rack marketing network; and through approximately 7,400 outlets under the Valero, Diamond Shamrock, Shamrock, Ultramar, Beacon, Texaco, and other names. As of December 31, 2014, it owned 15 petroleum refineries with a combined throughput capacity of approximately 2.9 million barrels per day. Valero also owns and operates 11 ethanol plants with a combined ethanol production capacity of approximately 1.3 billion gallons per year.

This is an interesting take on Buffett’s interest in PSX and what it could mean for VLO from long/short equity, value investor .

Valero Energy Corp. has been a strong company for many years. The stock has risen roughly 300% over the last five years; and its trailing twelve month PE is still only 7.06.
The picture below shows the locations of its refineries, etc.

Since the US is producing more light sweet crude (about 9.5 million bpd in 2015) than it has in the recent past, one might think VLO’s higher complexity abilities might be useless. However, this is not true. The Canadian oil sands crude is heavy sour crude. Much of the crude from Iran, Iraq, and Saudi Arabia (and others) is heavy sour crude. In addition the US may be on the verge of allowing exports of US crude oil for the first time in a long time. These things would mean that VLO could do very well for itself by processing heavy sour crude from the above locations, while paying less than the WTI light sweet crude price. This would put VLO in the “catbird seat”; and it appears that this is exactly what will eventually happen.

As investors can see VLO’s operating costs are already the lowest among its peers; and VLO’s Operating Income per barrel is nearly the highest among its peers. The new Enbridge pipeline project due to be completed in Q4 2015 should improve VLO’s results further.

One should consider the Keystone XL pipeline too. The southern and the northern parts of this have already been built. The middle section would allow about 830,000 bpd of Canadian Oil Sands crude (heavy sour crude) to move from Alberta to the US Gulf Coast. The remaining piece of this pipeline got Congressional approval in 2015; but it was vetoed by President Obama. Still Obama will be out of office in less than 1.5 years. The State Department study to evaluate whether the Keystone XL pipeline was in the best interest of the US should be done before that. The study is the excuse Obama used for vetoing the bill. The Senate didn’t have enough votes to override Obama’s veto; but Congress is sure to propose another bill as soon as the State Department study is done. Virtually everyone thinks this study will find that the Keystone XL pipeline is in the long term best interest of the US. If the US sees a recession in 2016, that too could push Congress and Obama to gain approval for a pipeline that will also create a lot of new jobs (42,000 in one estimate). A lot more heavy sour Canadian Oil Sands Crude being able to reach Texas could only help high complexity refiner VLO. VLO should then be able to demand still lower Arabian heavy sour crude prices. It should be able to use less WTI light sweet crude (more expensive than sour heavy crude). This should lead to more profitability for VLO.

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) (“Warren Buffett”) recently bought another 3.51 million shares in Phillips 66 (NYSE:PSX). This brings its total to 61.5 million shares — 11.4% ownership. Many consider VLO to be an even better company. If Warren Buffett is buying Phillips 66 , then some investors may wish to consider buying VLO.

VLO had a good to great Q2 2015. EPS were $2.66 per share compared to $1.22 per share in Q2 2014. Refineries operated at 96% capacity. Plus it guided for a payout ratio of 75% of FY2015 Net Income. VLO returned $870 million in cash to shareholders in Q2 2015. $203 million was in dividend payments; and $667 million was used to repurchase 11.3 million shares of VLO stock. This made the total payout ratio for 1H 2015 61% of Net Income. If VLO is going to reach its “declared” 75% of Net Income payout target for FY2015, it will have to increase its payouts for 2H 2015 substantially from those of 1H 2015. This should help the stock price.

White on the company’s fundamentals:

For VLO the fundamentals are good. It does not have overly much debt with a Total Debt/Total Capital (MRQ) of 25.04%, a Quick Ratio of 1.20x, and an Interest Coverage of 28.29x. By comparison, Phillips 66 , the stock that Warren Buffet is buying for Berkshire Hathaway (BRK-B), has a Total Debt/Total Capital (MRQ) of 27.85%, a Quick Ratio of 1.23x, and an Interest Coverage of –. VLO has $5.76B in total cash, $7.35B in total debt, Operating Cash Flow (“ttm”) of $6.62B, and Levered Free Cash Flow (“ttm”) of $3.93B. By comparison PSX has $5.09B in total cash, $8.96B in total debt, Operating Cash Flow (“ttm”) of $4.08B, and Levered Free Cash Flow (“ttm”) of -$2.22B. In other words, VLO appears to be in better fiscal condition than PSX.

Read more: If Buffett Is Buying Phillips 66, Valero Is Probably A Bigger Bargain Than It Seems – Valero Energy Corporation (NYSE:VLO) | Seeking Alpha

Hurco Companies, Inc. Cheap, cash-rich and the potential for growth $HURC

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Hurco Companies, Inc. (HURC) is an interesting stock in the All Investable Screener. With a market capitalization of just $196 million it is one of the smaller stocks in that screener, but its $62 million in net cash makes its enterprise value even smaller again at $134 million. Operating earnings of $25 million put HURC on an acquirer’s multiple of just 5.37x. With a PE of 11.3x and a free cash flow to enterprise value yield of 16 percent, HURC is cheap on any number of measures.

HURC is an industrial technology company founded in 1968 and is headquartered in Indianapolis, Indiana. It manufactures computerized machine tools for the companies in metal cutting industry primarily in North America, Europe, and the Asia Pacific. The company provides general purpose computerized machine tools, including vertical machining centers and turning centers, machine tool components and computer control systems for metal bending press brake machines. It serves precision tool, die, and mold manufacturers, independent metal parts manufacturers, and specialized production application in aerospace, defense, medical equipment, energy, automotive/transportation, electronics, and computer industries. HURC sells its products through independent agents and distributors, as well as through direct sales personnel.

Its F-Score (financial strength) at 7/9 is excellent, and it’s commensurately not financially distressed with a Z-Score of 4.65. With an M-Score of -2.76 it is also decisively not a manipulator.

Insiders have typically been buyers over the last few years.

HURC is an industrial technology company operating in a single segment. It designs and produces computerized machine tools, featuring its proprietary computer control systems and software, for sale through its own distribution network to the worldwide metal cutting market.

The principal factors contributing to its financial performance are as follows:

  • The market for machine tools is international in scope. HURC has both significant foreign sales and significant foreign manufacturing operations. During fiscal 2014, approximately 62% of its revenues were attributable to customers in Europe, where it typically sells more of its higher-performance, higher-priced machines. Approximately 10% of its revenues were attributable to customers in Asia, where it sells more of its entry-level, lower-priced machines, and where it also encounter greater price pressures. HURC sells products through more than 100 independent agents and distributors in countries throughout North America, Europe and Asia. It also has its own direct sales and service organizations in China, France, Germany, India, Italy, Poland, Singapore, South Africa, the United Kingdom and certain parts of the United States. The vast majority of its machine tools are manufactured to primarily by its wholly-owned subsidiary in Taiwan, Hurco Manufacturing Limited (HML). Machine castings and components to support HML’s production are manufactured at its facility in Ningbo, China.
  • During the third quarter of fiscal 2013 HURC acquired the machine tool component business of LCM S.r.l, an Italian designer and manufacturer of electro-mechanical components and accessories for machine tools. HURC uses LCM components in one of its lines of machining centers.
  • HURC’s sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies—primarily the Euro, Pound Sterling and Chinese Yuan—in the countries in which those customers are located. Its product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. Dollar. Changes in currency exchange rates will have a material effect on its operating results and consolidated balance sheets as reported under U.S. Generally Accepted Accounting Principles. For example, when the U.S. Dollar weakens in value relative to a foreign currency, sales made, and expenses incurred, in that currency when translated to U.S. Dollars for reporting in our financial statements, are higher than would be the case when the U.S. Dollar is stronger.

On an acquirer’s multiple of 5.4x, HURC is an attractively valued company. It will be beholden to the business cycle and its earnings are likely to be affected by the strength or weakness of the US dollar, but it looks like a good long-term bet because it is conservatively managed and has the potential for continued growth.

Christopher & Banks Corporation Cheap, but as ugly as it gets $CBK

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Christopher & Banks Corporation (NYSE:CBK) is another cheap, scary stock in the Small and Micro Cap Screener. With a market capitalization of $65 million, net cash of $36 million and operating earnings of $8 million over the last twelve months, CBK trades on an acquirer’s multiple of 3.73x, and a PE of 1.5x. It’s got an ugly -8 percent free cash flow / enterprise value yield, but has managed to buy back a paltry 0.7 percent of its stock over the last twelve months. CBK is a retailer of women’s apparel and accessories in the United States, which is an industry I hate. In short, it’s as ugly as they get, which is why it’s as cheap as it is. The good news is that one of the shareholders has turned activist, and it might be ready for some life.

Long/short equity, deep value, special situations, growth investor  doesn’t love it, but gives a good overview of the activists and their complaint:

…Christopher & Banks (NYSE:CBK) is finding some love. Macellum Capital owns about a 5.2% stake and has been active in the name since early April. It isn’t your typical activist, but it does know retail. Recall that it’s had success with effecting change at GIII, Hot Topic, Collective Brands, Children’s Place, etc. in the past.

With a focus on women’s apparel, CBK is in the sweet spot of retail, as opposed to those targeting more fickle teens [read: Abercrombie, American Eagle (NYSE:AEO), etc.]. However, profitability has been in rapid decline, hence the massive sell-offs since October.

Side note – Macellum pointed out that insiders were dumping the stock just before the huge sell-off in October, indicative of the fact that they aren’t confident of a turnaround anytime soon.

The rapid decline in CBK’s stock comes as same store sales have gone from a positive 4.9% in 3Q13 to a negative 7.6% in 3Q14 and then a negative 7.5% in 4Q14. EPS consensus for 2016 is now in the tank, with 2016 consensus EPS going from 80 cents in 3Q14 down to 30 cents currently.

We’re going to need a turnaround of large proportions.

The company has been blaming issues on poor execution with local fashion shows (where it surprisingly derives a lot of its sales) as well as the port strike, which delayed merchandise deliveries. But other retailers haven’t felt the same pressure with port strikes. And the fact that it’s having trouble at fashion shows could be a bigger problem, where it’s losing touch with its customers.

The thesis is to get new leadership in there, but it has already had four CEOs in the last five years. The board includes all Minneapolis-based business people, so some new blood is needed. Yet Macellum missed the deadline for nominating board members this year and the fund has never waged a proxy battle, either.

Source: Christopher & Banks: Macellum’s Retail Opportunity? – Christopher & Banks Corporation (NYSE:CBK) | Seeking Alpha

Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC): Strong, cash-rich balance sheet and a buyback

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If you were anywhere near finance twitter or television this week you’re aware that the markets are having a tough run at the moment. I’m trying to contain my excitement. Down 6 percent is really nothing. It only looks frightening because the markets have been so subdued for so long. I’d love another shot at a 2008 / 2009-type market, but that’s a few hundred points lower. In the interim, we can look for stocks that have already endured a long bear market and now trading way below intrinsic value.

One such stock is Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC). At $10.27, it is down almost 40 percent from its 52-week high, and seeing prices it last saw in 2013. It now trades on a market capitalization of $750 million, and an enterprise value of $274 million once its net cash of $476 million is backed out. It generated $74 million in operating earnings over the last twelve months, putting it on an acquirer’s multiple of 3.7x. It has a trailing PE of 11, and earnings FCF/EV of 14 percent. The company is taking advantage of its undervalued stock, and strong balance sheet: buying back 8 percent of its market capitalization over the last twelve months.

KLIC’s down because its business is cyclical. It manufactures capital equipment and expendable tools to assemble semiconductor devices, including integrated circuits, discrete devices, light-emitting diodes (LED), and power modules. Its a safe company. KLIC’s F-Score at 6/9 is excellent, and it’s Z-Score 4.97 is well into safe territory. Its Beneish M-Score at -1.59 is slightly into manipulator territory (anything greater than -2.22 is more likely to be a manipulator). KLIC’s poor M-Score could be a product of a slowing business–many of the components of the M-Score are somewhat arbitrary and aimed at finding companies trying to keep up the appearance of high sales growth by cooking the books through deteriorating earnings and asset quality, increasing leverage, slowing depreciation etc. None of KLIC’s M-Score components stand out as an issue. It’s at the margin on each, but tripping the absolute score in aggregate. I don’t think it’s actually a manipulator, but would recommend keeping an eye on its M-Score at each report.

In all, KLIC is a cheap, safe, cash-rich company buying back stock. It owns a cyclical business coming off a cyclical peak, and that’s why it’s cheap.

Growth at reasonable price, long-term horizon, long/short equity investor  likes it. Here’s his report in summary:

Fundamental Quality

To management’s credit the company has developed over the years with a focus on maintaining respectable operational efficiency metrics, although both the company’s TTM operating margin of 11.94% and TTM return on equity of 8.94% fall just short of the semiconductor equipment & materials industry averages. On an asset utilization basis; however, Kulicke and Soffa generates $0.12 more in revenue for every dollar in assets than the average company operating in the space.

Meanwhile, the company’s balance sheet is impeccably strong with the company’s $475.9 million in cash and cash equivalents totalling nearly three times more than the company’s total liabilities. A total debt-to-equity ratio of 0.00 and a current ratio of 7.80 only reinforce the company’s superior balance sheet positioning.


Looking back over recent history Kulicke and Soffa has been mixed in growing its top and bottom lines with the company having to deal with a massive drop-off in revenue and earnings in 2013.

KLIC Revenue (<a href=

Moving forward analysts expect the underlying growth trends for the company to at the very least stabilize, with revenue expected to drop 2.1% in 2015 and return to 10.6% growth in 2016. On the bottom line EPS is forecasted to deteriorate from $0.81 in 2014 to $0.79 this year and $0.58 in 2016.

The mixed picture of growth for Kulicke and Soffa is expected to result from the company’s large exposure to Asia. With 80% of the company’s overall sales coming from this region and most expecting at the very least a sizeable economic slowdown in this region this exposure is likely to be more of a growth hinderance than driver in coming years.

Even with the recent slowdown in the semiconductor industry long-term the growth dynamics are in favor of Kulicke and Soffa. According to Gartner June 2015 projections the global semiconductor market will grow at a 9% compound annual growth rate on an unit basis and at a 4% compound annual growth rate on a revenue basis until 2019.

Another major potential growth driver for the company comes in the form of its recent entrance into the advanced packaging market, which according to March 2015 projections by VLSI Research will grow at a 15% compound annual growth rate until 2019. With the company having only recently entered this market there also exists the potential for Kulicke and Soffa to gain significant market share.

Here’s where he sees the value:


KLIC Semiconductor Equipment & Materials Industry
Price to TTM Earnings 11.32 18.62
Price to TTM Sales 1.29 2.70
Price to Book Value 0.96 2.70

According to the above valuation profile Kulicke and Soffa trades at a steep discount to its industry peers on every displayed comparable basis. This depression in valuation is something that has long been characteristic of the company, but has recently been extenuated dramatically by the steep decrease in the company’s stock price.

To put Kulicke and Soffa’s current valuation into perspective, it is worth noting that at current prices Kulicke and Soffa trades at 4.12x earnings less cash. While this specific metric has never climbed above 10 over the past half decade, the current level is certainly overly-punitive of Kulicke and Soffa’s business prospects.

I see shares justified in trading as high as $15.80 (20 P/E ratio * 2015 EPS estimate) within the next year.

Apollo Education Group, Inc. (NASDAQ:APOL): Cheap and Nasty

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Apollo Education Group, Inc. (NASDAQ:APOL) is one of those stocks that tests the patience of value investors. Like the rest of the for-profit education industry, it’s been in a tail spin for years. The problems are well known: For-profit educators exploited the torrent of government money available for higher education and loaded students with too much debt for jobs that held little prospect of repaying the loans. The government’s response has been to turn off the spigot by mandating colleges meet minimum levels of gainful employment and maximum debt-to-starting salaries. This has in turn led to declining enrolments, revenues, profits and a swathe of bankruptcies. Many long investors have put the industry in the too-hard basket for the massive regulatory risk it has attracted. Other have been short to the gills. Both have have been smart trades for going on ten years now.

Here’s one smart take on APOL’s ongoing problems. In Apollo: Who Is Minding The Shop? contrarian, long/short equity investor  points the bone at management: 

Several analysts on the investor call actually called Cappelli out on the fact that Apollo has been in constant turnaround mode under his current and former co-regime and that at some point The Street is going to wonder why anybody sane at the company hasn’t taken a look at “management”. Of course, Cappelli was quick to blame individual college Boards and individual college management teams. He then followed this passing of the buck by stating that Apollo would do anything to help these managers be successful. So who is minding the shop? Who is really running this show? I thought it was Cappelli. Maybe I’m wrong?

The point is that Apollo is facing an incredibly tough uphill climb and it largely has nothing to do with Apollo’s University of Phoenix. Largely, for-profit educational institution is simply outdated. Still, there are things that can be done to evolve the model (as was suggested by an analyst on the call) and things than can be done to aggregate market share that is bleeding out of other players. Cappelli clearly doesn’t “get” any of these.

If Apollo is to be saved it needs leadership that can take it through the most difficult transition the company has ever faced. This isn’t Cappelli and this isn’t the sitting board. I continue my call for the removal of both.

Salazar is short, but might change his mind given a change in management. I have some sympathy for the view that out or short continue to be smart trades, but I think APOL is now simply too cheap to ignore.

The numbers are eye-popping. With a market capitalization of $1.254 billion, and net cash of almost $900 million, APOL trades on an enterprise value of just $356 million. It generated operating earnings of $224 million in the last twelve months, putting it on an acquirer’s multiple of just 1.59x. A little over $119 million of the operating earnings are free cash flow, putting it on a FCF/EV yield of 33 percent. It’s used that cash flow to buy back 7.4 percent of its outstanding stock last year.

With so much cash on hand, and such great free cash flow figures, APOL needs to light a fire under the buyback. According to the most recent earnings call (transcript here), share repurchases are still on the menu:

Denny Galindo – Morgan Stanley

Okay, that’s helpful. One other one on capital management. It sounds like you’re kind of shrinking the organization to the right size and there is a little bit of uncertainty over the next two years as you finish your plan of what that size is. Does this mean you’re going to shift away from repurchases and more towards acquisitions in say Apollo Global, as a use of capital over the next two years until you have a better idea of where the right size for the organization is?

Greg Cappelli – Chief Executive Officer

You know I didn’t say that. What I said is, given the circumstances we look at that capital every single quarter with our board, I think there are times when share repurchases have in the past and will continue to make sense. We look at sort of a pyramid of every dollar we use, whether it’s in global or, frankly, we are investing back into certain areas of our domestic operations or the B2B solutions which we have been spending some money on at, professional development as well, and we look at those returns sort of in order. And we do think that there is an appropriateness at certain times for share repurchases as well and that will continue to be part of the dialogue going forward. It’s hard for us to signal exactly how much we are going to spend and in what areas because we are not allowed to do that. But it certainly has been part of the conversation and is every quarter when we meet with our board.

APOL really gets my gag reflex going. It’s been Waterloo for value guys for years now, and the short arguments sound smart. It’s also way too cheap. At these levels, it warrants a small position.

I don’t currently hold it, but I’ll buy into it at the next rebalance date (October 1) if it remains in the screen.


Greenblatt and Asness on Periods of Underperformance for Value

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Fascinating note from Forbes on the underperformance of Joel Greenblatt’s mutual funds that implement the Magic Formula:

[I]nstead of trying to paint Gotham’s year-to-date returns as indicative of any obvious flaw in strategy, it’s likely a far stronger data point to use as a read on the overall market. Its struggles should cause a bit of alarm for the ordinary investor. Oftentimes, the best investors over a market cycle underperform during times of what Nobel laureate Robert Shiller calls ‘irrational exuberance.”

During the peak of the dot-com bubble, the financial press wondered aloud whether Berkshire Hathaway BRK.B +% Warren Buffett lost his touch as wax-winged firms like Webvan dramatically outperformed ‘old economy’ stocks. When bubble burst, Berkshire then enjoyed one of its great spells of outperformance. There are countless similar stories. In a 2014 essay for Institutional Investor, AQR’s Cliff Asness recalled launching his hedge fund in 1998 with a similar strategy to Gotham’s funds:

We were long cheap stocks and short expensive stocks, right in front of the worst period for value strategies since the Great Depression… Not long cheap stocks alone, which simply languished, but long cheap and short expensive! We remember a lot of long-only value managers whining at the time that they weren’t making money while all the crazy stocks soared. They didn’t know how easy they had it.

In watching Gotham’s performance tail off this year — returns outperformed initially leading to big asset inflows — it’s hard not to wonder whether it reflects a similar bout of over-exuberance, or extreme overvaluation in some sectors. Gotham, through a spokesperson, declined to comment or give color to any particular sectors or stocks that have driven underperformance.

However, a look through Gotham’s public filings indicates it has minimal exposure to the cratering energy sector, or on-the-ropes coal, commodities, and metals producers. The firm’s Absolute Return Fund reported a 15% exposure to the under-performing industrial sector, and an ownership of semiconductor stocks, potentially causing returns to tail off. A 5% exposure to healthcare has also likely missed the boat on this year’s M&A wave.

But it is more likely that the short portfolio has driven underperformance, even in a flat market. Per Bloomberg data, it is the bubble-prone Internet sector that’s leading the S&P 500, gaining 57% year-to-date, followed by home entertainment systems and construction materials. Those three sectors would likely capture big 2015 winners such as Netflix NFLX +1.63% (up 133%), (up 73%), Martin Marietta Materials (up 42%), and Vulcan Materials (up 39%) — all of whom sometimes find themselves the target of short sellers, or bouts of overvaluation.

Perhaps, Gotham’s performance indicates there’s a looming upward correction in industrial and semiconductor stocks and a downward move in high flying internet and social media stocks. After a rocky start to the first half of 2015, marked by a tumble in businesses sensitive to global commodity prices and economic growth, perhaps more challenges are in store if high multiple stocks also turn south.

In that instance, expect Gotham to recover. The fund after all explicitly states its is likely to underperform broad markets over quarterly and yearly periods. “If there were an investment strategy that worked every day, every month and every year, eventually everyone would follow it and it would stop working,” Gotham states in its fund prospectus.

“Though for months, quarters and even longer this strategy may underperform one benchmark or another, this is the only way we know how to invest. In fact, we strongly believe that short periods of underperformance are a major reason why more people do not adopt our logical, disciplined approach,” it adds, citing research that shows over the past decade 96% of the top quartile managers spent at least one three-year period in the bottom half of performance rankings, and 79% spent three years in the bottom decile of performers.


Source: Value Guru Joel Greenblatt’s Performance Could Be A Sign Of Overheated Stock Market

A Lesson in Portfolio Construction: “One Good Icahn Energy Bet Undoes Several Years of Bad Calls” – Bloomberg @Business

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Oil’s crash would have been every bit as cruel to Carl Icahn as it was to other investors, except the billionaire had a very important ace in the hole: a little-known refiner and fertilizer maker based in Sugar Land, Texas. Icahn’s 2012 purchase of CVR Energy Inc. has returned more than $2.5 billion to the activist hedge fund manager from market gains and dividends, according to data compiled by Bloomberg.

That more than makes up for the $1.6 billion in paper losses that have piled up from his other bets on oil and gas companies as the shale revolution helped bring about a global glut. All told, Icahn’s major forays into energy have brought him a net gain of almost $1 billion since 2012, according to investment data compiled by Bloomberg based on public filings and average quarterly share prices. That’s an annualized return of more than 5 percent.

Source: One Good Icahn Energy Bet Undoes Several Years of Bad Calls – Bloomberg Business

Perion Network Ltd. ($PERI): Cheap, cash rich, and generating cash

Tobias CarlisleStocks1 Comment

Big changes in the composition of the screeners this week, giving us lots of exciting new stocks to dig into. While the indexes only declined a few points, under the surface the waters are roiling, with big declines from many stocks. Earnings season has also shaken up the fundamental picture. AU Optronics Corp. (AUO), for example, now the cheapest stock in the Large Cap Screener, is off 45 percent over the last two months. LG Display Co Ltd. (ADR) (LPL), the second cheapest stock in the Large Cap Screener is off 40 percent over the last six months.

Perion Network Ltd. (NASDAQ:PERI) is a new entrant into the All Investable Screener. At its $2.74 price at the time of writing, it has a market capitalization of $189 million. Net cash to the tune of $83 million puts it on an enterprise value of just $106 million, against which it has generated operating earnings of $79 million, making for a tiny 1.35x acquirer’s multiple.

The company, headquartered in Holon, Israel, provides online publishers and app developers various data-driven solutions to monetize and promote their application or content. It offers Perion Codefuel, a software monetization platform that allows digital businesses to optimize installs and analyze data; and Grow Mobile, an app promotion platform for mobile advertising, which enable advertisers of mobile applications to buy, track, optimize, and scale user acquisition campaigns from a single dashboard.

The company also provides consumer applications, such as IncrediMail, a unified messaging application that allows consumers to manage multiple email accounts and Facebook messages in one place; and Smilebox, an Internet photo sharing service for desktops and smart-phones, as well as offers Violet, a do-it-yourself wedding design tool.

The stock has been crushed–down almost 30 percent over the last three months–because the company is transitioning to a new business model, and the revenue run rate and operating earnings is likely to drop in the short term. Management have stated on the most recent earnings call that the company will return to growth by year end.

By year end, our monetization business will have returned to revenue growth, and, having completed a year of transition to our new revenue model, its profit margins will stabilize at a very healthy level. This business will continue to deliver strong cash flows that we intend to invest back into the business to fuel future growth.

The company is cheap on any number of metrics, trading on a PE of 5.4 and a FCF/EV yield of 53 percent. With its huge cash pile and ongoing cash generation, management should consider a buyback, but the company has tended to be a net issuer, and management have been slow to embrace the idea, arguing for–blurgh–acquisitions:

Our cash balance continues to grow, reflecting the strong free cash generation of our business, and stands at approximately $128 million at quarter end. I know many investors have enquired about a share buyback and given our current stock price, it is something we have and are considering. We also feel we have a strong pipeline of M&A opportunities and continue to weigh all options to deploy our cash in a manner that best increases long term shareholder value.

I like it because it’s price for the woodshed, but with a balance sheet like that, it’s not going anywhere. And the upside is enormous once the business stabilizes, and that is reflected in the earnings.
Long only, value, contrarian investor  believes that it’s too cheap, and likely to return to growth:

PERI appears attractively priced on a valuation basis

This punishment of the stock has created what I believe to be a good entry point allowing one to own shares of a company that not only is still profitable but is selling at attractive multiples:


Source: Data obtained from Yahoo Finance, Google Finance and Morningstar

As one can see, PERI looks very undervalued in regard to every metric displayed above. In addition, looking at the balance sheet reveals that PERI currently has almost $120 million in cash and short-term investments. In comparison, its total debt is only about $37 million. This is mainly why its enterprise value is less than its market cap. This is a very important point as this cash gives management the ability to make acquisitions to further its evolution toward a more mobile-centric tech company, something they have been doing recently.

PERI has been hit hard over the last year due to declining revenue and concerns regarding its business model. While these concerns may be somewhat justified, I believe the market is being overly pessimistic in its assumptions and is pricing PERI much too low. PERI has low debt, low valuation multiples, almost $120 million in cash, and it’s increasingly focused on mobile advertising which could very well provide substantial growth for PERI in the coming years. In a market that one could argue is overvalued, PERI appears to be one of the few companies that’s anything but.

Read more: Perion Network: Priced For Oblivion, Poised For Growth – Perion Network Ltd. (NASDAQ:PERI) | Seeking Alpha

The Icahn Strategy

Tobias CarlisleStudyLeave a Comment

Icahn Enterprises Cover

From Icahn Enterprises L.P. December 2013 Investor Presentation:

Across all of our businesses, our success is based on a simple formula: we seek to find undervalued companies in the Graham & Dodd tradition, a methodology for valuing stocks that primarily looks for deeply depressed prices. However, while the typical Graham & Dodd value investor purchases undervalued securities and waits for results, we often become actively involved in the companies we target. That activity may involve a broad range of approaches, from influencing the management of a target to take steps to improve shareholder value, to acquiring a controlling interest or outright ownership of the target company in order to implement changes that we believe are required to improve its business, and then operating and expanding that business. This activism has brought about very strong returns over the years.

Today, we are a diversified holding company owning subsidiaries engaged in the following operating businesses: Investment, Automotive, Energy, Gaming, Railcar, Food Packaging, Metals, Real Estate and Home Fashion. Through our Investment segment, we have significant positions in various investments, which currently include Chesapeake Energy (CHK), Forest Laboratories (FRX), Netflix (NFLX), Transocean Ltd. (RIG), Apple Inc. (APPL), Herbalife Ltd. (HLF), Nuance Communications, Inc. (NUAN), Talisman Energy Inc. (TLM) and Hologic Inc. (HOLX).

Several of our operating businesses started out as investment positions in debt or equity securities, held either directly by Icahn Capital or Mr. Icahn. Those positions ultimately resulted in control or complete ownership of the target company. Most recently, we acquired a controlling interest in CVR Energy, Inc. (‘‘CVR’’), which started out as a position in our Investment segment and is now an operating subsidiary that comprises our Energy segment. As of November 29, 2013, based on the closing sale price of CVR stock and distributions since we acquired control, we had gains of approximately $1.7 billion on our purchase of CVR. The recent acquisition of CVR, like our other operating subsidiaries, reflects our opportunistic approach to value creation, through which returns may be obtained by, among other things, promoting change through minority positions at targeted companies in our Investment segment or by acquiring control of those target companies that we believe we could run more profitably ourselves.

In 2000, we began to expand our business beyond our traditional real estate activities, and to fully embrace our activist strategy. On January 1, 2000, the closing sale price of our depositary units was $7.625 per depositary unit. On November 29, 2013, our depositary units closed at $121.07 per depositary unit, representing an increase 1,850% since January 1, 2000 (including reinvestment of distributions into additional depositary units and taking into account in-kind distributions of depositary units). Comparatively, the S&P 500, Dow Jones Industrial and Russell 2000 indices increased approximately 60%, 95% and 172%, respectively, over the same period (including reinvestment of distributions into those indices).

During the next several years, we see a favorable opportunity to follow an activist strategy that centers on the purchase of target stock and the subsequent removal of any barriers that might interfere with a friendly purchase offer from a strong buyer. Alternatively, in appropriate circumstances, we or our subsidiaries may become the buyer of target companies, adding them to our portfolio of operating subsidiaries, thereby expanding our operations through such opportunistic acquisitions. We believe that the companies that we target for our activist activities are undervalued for many reasons, often including inept management. Unfortunately for the individual investor, in particular, and the economy, in general, many poor management teams are often unaccountable and very difficult to remove.

Unlike the individual investor, we have the wherewithal to purchase companies that we feel we can operate more effectively than incumbent management. In addition, through our Investment segment, we are in a position to pursue our activist strategy by purchasing stock or debt positions and trying to promulgate change through a variety of activist approaches, ranging from speaking and negotiating with the board and CEO to proxy fights, tender offers and taking control. We work diligently to enhance value for all shareholders and we believe that the best way to do this is to make underperforming management teams and boards accountable or to replace them.

The Chairman of the Board of our general partner, Carl C. Icahn, has been an activist investor since 1980. Mr. Icahn believes that he has never seen a time for activism that is better than today. Many major companies have substantial amounts of cash. We believe that they are hoarding cash, rather than spending it, because they do not believe investments in their business will translate to earnings.

We believe that one of the best ways for many cash-rich companies to achieve increased earnings is to use their large amounts of excess cash, together with advantageous borrowing opportunities, to purchase other companies in their industries and take advantage of the meaningful synergies that could result. In our opinion, the CEOs and Boards of Directors of undervalued companies that would be acquisition targets are the major road blocks to this logical use of assets to increase value, because we believe those CEOs and Boards are not willing to give up their power and perquisites, even if they have done a poor job in administering the companies they have been running. In addition, acquirers are often unwilling to undertake the arduous task of launching a hostile campaign. This is precisely the situation in which we believe a strong activist catalyst is necessary.

We believe that the activist catalyst adds value because, for companies with strong balance sheets, acquisition of their weaker industry rivals is often extremely compelling financially. We further believe that there are many transactions that make economic sense, even at a large premium over market. Acquirers can use their excess cash, that is earning a very low return, and/or borrow at the advantageous interest rates now available, to acquire a target company. In either case, an acquirer can add the target company’s earnings and the income from synergies to the acquirer’s bottom line, at a relatively low cost. But for these potential acquirers to act, the target company must be willing to at least entertain an offer. We believe that often the activist can step in and remove the obstacles that a target may seek to use to prevent an acquisition. We have spent many years engaging in the activist model which we believe will be increasingly important in the coming years.

It is our belief that our strategy will continue to produce strong results into the future, and that belief is reflected in the action of the Board of Directors of our general partner, which announced on May 29, 2013, an increase to our annual distribution from $4.00 to $5.00 per depositary unit. We believe that the strong cash flow and asset coverage from our operating segments will allow us to maintain a strong balance sheet and ample liquidity.

In our view Icahn Enterprises L.P. is in a virtuous cycle. We believe that our depositary units will give us another powerful activist tool, allowing us both to use our depositary units as currency for tender offers and acquisitions (both hostile and friendly) where appropriate, and to increase our fire power by raising additional cash through depositary unit sales. All of these factors will, in our opinion, contribute to making our activism even more efficacious, which we expect to enhance our results and stock value.

Here’s the May 2015 update.

Valero Energy Corporation ($VLO): Cheap, safe and running

Tobias CarlisleStocksLeave a Comment

Valero Energy Corporation ($VLO), which at one point was the cheapest stock in the Large Cap 1000 Screener and the All Investable Screener, is having a blockbuster year, up 33 percent to date (I’ve been pitching it since September last year, here with Jeff Macke on Yahoo Finance). Even so, the business continues to improve at a rapid rate and it continues to be the second cheapest name in the Large Cap 1000 Screener and the seventh cheapest name in the All Investable Screener. That might be because, unlike the usual stocks covered here, it’s carrying net debt to the tune of $2.2 billion. With its $33 billion market cap, the debt pushes the enterprise value to $35.2 billion. It earned $7 billion in operating earnings last year, putting it on an acquirer’s multiple of 5x. Its PE ratio is just 7.5x. It earned free cash flow / enterprise value of 7 percent, which supports a 1 percent dividend yield and a 4.1 percent buyback yield for a fat 5.9 percent shareholder yield.

With a net debt position, its safety is worth examining in detail. The news there is good: it’s plenty safe. VLO is financially strong, with an F-Score of 7/9 (it falls down on asset turnover–revs/total assets–which fell year-on-year from 3x to 2.5x, and gearing–long-term debt/average assets–which increased from 12 percent to 15 percent). Its Z-Score of 4.75 puts it well into the safe zone away from financial distress (north of 2.99 is considered safe), and VLO’s M-Score of -3.14 means that it’s not a manipulator (anything under -2.22 is good news).

Long only, value, dividend investing research analyst  likes it too. Here’s his piece:

Valero is generating strong free cash flow (ttm price to free cash flow is very low at 12.93) and returns value to its shareholders. Joe Gorder, Valero’s Chairman, emphasized in the latest quarter report that the company continues to focus on its key priorities of optimizing its operations, generating strong results, and returning cash to stockholders. In fact, Valero increased its targeted total payout ratio to approximately 75% of 2015 net income from the previous target of 50%. The company defines total payout ratio as the sum of dividends plus stock buybacks divided by net income from continuing operations attributable to Valero stockholders. Valero returned a total of $870 million in cash to stockholders in the second quarter of 2015, of which $203 million was paid in dividends and $667 million was used to purchase 11.3 million shares of Valero common stock. According to its latest price, the forward annual dividend yield is at 2.44% and the payout ratio only 16.6%. The annual rate of dividend growth over the past three years was very high at 51.8%, over the past five years was at 11.8%, and over the past 10 years was very high at 21.8%.

VLO Dividend Chart

VLO Dividend data by YCharts

In my previous article about Valero from May 13, I argued that the retreat in its stock price offered an excellent opportunity to buy the stock at a cheap price. Meanwhile, since then the stock has gained 14%. However, Valero’s fundamentals look even better now, and, in my opinion, shares could go much higher.

Arie sees it as “extremely undervalued:”

Regarding its valuation metrics VLO’s stock is extremely undervalued. The trailing P/E is very low at 9.15, and the forward P/E is also very low at 10.03. The price-to-sales ratio is extremely low at 0.27, and the enterprise value/EBITDA ratio is very low at 4.64, Moreover, its PEG ratio is also very low at 0.64, the 12th lowest among all S&P 500 companies.

Source: Portfolio123

The PEG Ratio – price/earnings to growth ratio is a widely used indicator of a stock’s potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.

Despite a very good year-to-date, VLO remains one of the cheapest stocks in the screeners. Arie notes that, “[a]ccording to TipRanks, the average target price of the top analysts is at $93, 42% up from its July 28 closing price.” It’s also a safe stock, passing all the metrics I like to examine.

Read more: Valero Energy Continues To Surprise – Valero Energy Corporation (NYSE:VLO) | Seeking Alpha

Movado Group, Inc. ($MOV): Cheap, safe and buying back stock

Tobias CarlisleStocks2 Comments

It’s no secret why Movado Group, Inc. ($MOV) is in the bargain bin. Investors fear that the beast of 1 Infinite Loop, Cupertino–Apple, Inc.–has done for watches what it did for Walkmans (the iPod), desktop PCs (the iMac), music (iTunes), laptops (the Macbook), and cell phones (the iPhone), not to mention tablets (the iPad), and whatever the AppleTV replaced (the VCR?). With a string of category- and competitor-killing hits like that, it’s no wonder that the stocks of watchmakers are in the dumps. But when branded consumer goods producers get beaten up I like to take a very close look. Nothing compounds like asset-light consumer brands. And if you can get them at a deep undervaluation, the risk:reward proposition becomes truly asymmetric, as I believe it is for MOV now. Let’s take a look at the company.

MOV designs and markets watches wholesale and retail through the company’s outlet stores. Its portfolio of brands includes Coach Watches, Concord, Ebel, ESQ Movado, Scuderia Ferrari Watches, HUGO BOSS Watches, Juicy Couture Watches, Lacoste Watches, Movado and Tommy Hilfiger Watches. Based in Paramus, New Jersey, it has operations in United States, Europe, the Americas, Asia and the Middle East.

MOV has a market capitalization of $593 million at its $24.61 share price at the time of writing. It has $159 million in net cash on its balance sheet, and generated operating earnings over the last twelve months of $70 million. That puts it on an acquirer’s multiple of 6.2. The acquirer’s multiple is a variation of the more familiar enterprise multiple, the valuation ratio used by activists and private equity firms to find attractive takeover candidates.

It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization.
It is calculated as follows:

Enterprise Value / Operating Earnings

where enterprise value is the market capitalization plus total debt, minority interests, and any preferred stock less cash and equivalents; and

operating earnings is a measure comparable to EBIT, but constructed from the top of the income statement down (EBIT is 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–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (Wiley Finance, 2014). The Acquirer’s Multiple has a free list of the cheapest stocks in the largest 1000 US exchange-traded stocks and ADRs. (MOV is on the paid All Investable Screener.)

MOV trades on a PE of 13.2x, and has generated free cash flow / enterprise value yield of 9 percent over the last twelve months. It pays a small dividend, yielding 1.7 percent at prevailing prices.

So we know MOV is unusually cheap, and we know why, but, as Laurence Olivier’s evil Szell asks over and over again of Dustin Hoffman’s character, Babe, in 1976’s Marathon Man, “Is it safe?”

After determining that a stock is cheap, I ask myself, “Is it safe,” with this level of intensity until it yields up an answer. There are a number of statistical tools we can apply to drill MOV’s teeth, and we’ll get to those shortly, but its squeaky clean, cash-rich balance makes for an attractive starting point. Its Altman Z-Score–a measure of the likelihood that a company will end up in bankruptcy within 2 years–of 5.86 indicates that it is far from financially distressed (greater than 2.6 is considered safe). MOV’s Piotroski F-Score is 5 out of a possible 9, which is about average for a stable company. (It misses on 4 dimensions but remains strong on each: Its return on assets slipped year-on-year, but it still generated 8.35 percent on assets; its gross margins fell, but remain very healthy at 52 percent; its current ratio slipped, but remains very high at 5.4x; and its asset turnover slipped, but still sits at about 1x, down from 1.1x last year). MOV’s Beneish M-Score of -2.67 also indicates that it’s not an earnings manipulator (anything greater than -2.22 is good news). From a statistical perspective, it’s not close to financial distress (in fact it’s financially strong), and there’s no indication of earnings manipulation. It’s safe.

Short interest spiked in May to 10.84 percent of the float, but has fallen each month since to its most recent 9.61 percent on July 15. It’s close to its historical peak, and short money tends to be smart money–it’s certainly been the right bet since MOV’s ~$47 stock price peak in November 2013–but the fact that short interest is now declining may indicate that the shorts have got what they want, and are ready to move on.

An issue for MOV is that management don’t own much stock. Collectively they hold around 3 percent of the company, most of which has come from option grants. The largest holder is Vice Chairman Cote with 1.77 percent, and he is a net seller. CEO Grinberg’s stock has a market value of $2.48 million. While that is nice sum, in context with his $2.5 million in compensation this year, it isn’t material. I believe that when managers have a significant holding in their own stock (material relative to their own net worth and income) they tend to be focussed on the price of stock relative to its intrinsic value. A Henry Singleton-type manager–one that thinks like an owner–would use some of MOV’s huge cash hoard to buy back the stock while its cheap. Doing so increases the intrinsic value of each share remaining outstanding, and allows shareholder who want to sell to get out of a relatively illiquid stock. Shareholders who believe in the company get a tax efficient boost to the value of the shares they hold. To management’s credit, and despite their small holdings, MOV has a substantial $100 million buyback authorization in place. (The board increased an existing share repurchase authorization to $100 million on November 25, 2014.) In the first quarter that resulted in net repurchases of around $22 million at an average price of $25.87–a small premium to the current market price. At this pace, MOV will buy back the full $100 million before the end of the year–a material sum relative to its ~$600 million market cap, equating to about 15 percent of the outstanding stock at current prices–and be left with more than $100 million in cash and equivalents, excluding whatever they earn between now and December 31. With any luck, they’ll complete the buy back and re-authorize another the same size.

MOV possesses many of the qualities I like in a stock. At $24.61, it trades on an acquirer’s multiple of 6.2x, which is very cheap. With $160 million in net cash on the balance sheet, it’s cash rich, and liquid, and it passes all of the safety screens with flying colors. While management don’t hold a lot of stock, the company is undertaking a material buy back that will significantly boost per share intrinsic value. That’s usually enough for me to take a position. I know many investors need to dig into the business, which is something I’ve conspicuously not done here. How the watch business will fare against the category-killing beast from 1 Infinite Loop is anyone’s guess. My sense is that watches are different from other tech gadgets because they serve as jewelry too. I own almost all of the other Apple gadgets I listed at the start of the article, but the watch doesn’t appeal to me at all, while high-end watches do. (I’ve talked about it previously, but not in detail: Ten years ago I bought a swiss watch from the auction of the deceased and bankrupt estate of flamboyant Australian corporate raider, stock market operator, and insider trader Rene Rivkin. I paid less than the value of the gold content in the watch. When I had it appraised 5 years later I discovered that, despite the gold price trebling in the interim, I had somehow managed to overpay. What’s worse is that it’s a really garish watch I’ve worn five times, wearing a dinner suit each time because nothing else seems appropriate. Shows how little I know about watches). I digress. I won’t pay up for a compounders, but I’ll buy them cheap. And MOV is a very cheap stock, with the potential to continue its historical compounding. Most importantly, management is proactively embracing the opportunity to exploit the discount in the stock by buying it, if not for their own accounts, at least for the company’s. I am doing the same. Long MOV.

AVX Corporation ($AVX): Cheap, safe, dividend payer at an historically high yield

Tobias CarlisleStocksLeave a Comment

AVX Corporation (NYSE:AVX) is another unusually cheap stock in the All Investable Screener. At $13.36, it has a market capitalization of $2.2 billion, and with net cash of $844 million, an enterprise value of $1.4 billion. It generated operating earnings over the last twelve months $212 million, putting it on an acquirer’s multiple of 6.6x. It has a PE of 9.5, and generated a free cash flow / enterprise value yield of 7 percent over the last twelve months. AVX is controlled by its Japanese parent, Kyocera Corporation of Japan, which owns 72 percent of its stock, so it’s not a potential activist or takeover target, it’s just cheap, and safe.

AVX is a manufacturer of a broad line of “passive electronic components” used to store, filter or regulate electric energy. The company’s products include ceramic and tantalum capacitors, film capacitors, varistors, filters and other components manufactured in its facilities throughout the world, and by Kyocera. It operates in three segments: Passive Components, Kyocera Electronic Devices (KED Resale) and Interconnect.

Our statistical tools indicate that AVX is a safe stock, with no indication of earnings manipulation, fraud, or financial distress. AVX has an Piotroski F-Score of 6/9, which is a solid score. It falls down in three areas: quality of earnings (it generated $198 million cash flow from operations against $226 million in net income, but is still generating healthy cash flow), working capital liquidity (its current ratio deteriorated from 10.9x, to 6.5x, but remains very good), and it issued a small amount of stock (increasing outstanding shares from 168.4 million to 168.5 million, an immaterial number, which, when we update with the most recent results, will reverse to net buyback). It has a Altman Z-Score of 6.6, which indicates it is in the safe zone and far from financially distressed, and its Beneish M-Score is -2.7, which indicates it is not an earnings manipulator (anything less than -2.22 is a good score). It’s a safe stock.

The cold, dead hand on AVX’s stock price is its Japanese parent. There’s no potential for activism other than through public embarrassment, but it’s conservatively managed, so there’s be little to complain about other than the huge pile of cash on the balance sheet. Management might reasonably argue that it’s a cyclical business so some cash buffer is required, but nigh on $1 billion seems too conservative to me. There’s always the possibility that Kyocera decides to spin it off or sell it to management and a private equity firm, but if or when that might happen is unknowable. Its Q1 results, which, a little confusingly, ended on June 30, are good. They show cash, and cash equivalents etc of $936 million and no debt. The company paid a minuscule $17.6 million in dividends to achieve its solid 3.1 percent dividend yield. What is interesting is that its dividend yield is as high as it has ever been, and it has tended to go on a run from here. In late October 2012 it traded at approximately the same level and ran from $9.45 to as high as $14.5 earlier this year. Encouragingly, the company has also used $3.4 million to repurchase shares in the open market. It’s not much, but it’s better than net issuance. AVX has been an buying back stock consistently for the last 10 years, likely to cement Kyocera’s control. Even so, the little ongoing buyback, combined with a easily covered, fat dividend yield at historical heights, makes this a cheap, safe stock that could run 50 percent or so.