As you read the comments, keep in mind that every company can be a great opportunity at one price and a horrible investment at another.
My comments are based on current prices.
Hard to Find Good Investments
60 stocks have now been completed and it’s clear that finding quality companies is a difficult task. The market is still loaded with mediocre opportunities at mediocre prices. All I can do is keep turning over as many stones as possible. The more rocks you flip over, the more opportunities you are bound to come across.
Meridian Bioscience (VIVO): Solid and stable margins. Does not pay taxes? If they have NOL’s how long will it last? Very healthy, no debt and ROE is averaging 22% in past 5 years. Growth looks to be coming down to the 13% range. FCF positive for past 10 years. Worth looking further into but expectations are too high and looks to be fairly priced now. However, based on absolute PE method, 13% growth + 4.79% dividend produces a fair PE of 20 to 22.
Steven Madden (SHOO): Increasing sales, margins, FCF since 2003. Excellent growth but it involves acquisitions. Receivables and inventory growth looks to be getting out of hand. In MRQ, inventory jumped 100%. No debt. ROE and CROIC is getting into the 20% range. Inventory turnover being managed well. However this is a retail and shoe business. No moat. I can easily buy another designer shoe.
American Science & Engineering (ASEI): Government contracts lead to high revenue and margins. Based on earnings power it looks like company has a big moat. New xray machine technologies being used in airports for security. Security is continually an issue so demand will likely remain. 10 years of shareholders equity growth. Bought back a lot of stock in 2008 when prices were low. Lots of “sale of assets” in investing activities. Paid dividend since 2008. 5 yr ROE is 14.6% and CROIC is 13.6%. Very healthy. Just doesn’t look cheap enough.
National Instruments (NATI): Use their products at work. No moat engineering software. Easily replaceable. EPV suggests the same thing. Dependent on corporate spending. Efficiency increasing leading to highest margins achieved in its history. Growth is slow. Looks mediocre.
Ampco-Pittsburgh (AP): Erratic cash flow with slowing sales. Low ROE and CROIC. Nothing impressive.
L.B. Foster Company (FSTR): Made an acquisition within the year. Has paid off most of the debt. Cyclical but making money. However looks like a value trap as the growth and ROE, CROIC is not high enough to earn more than the cost of capital. No moat biz.
Lufkin Industries (LUFK): Cash flow is erratic. and CROIC is 0-1% since 2009. They can’t perform in a recession margins have been squeezed considerably. No moat. Pass.
Natural Gas Services Group (NGS): High capital intensive. Margins are good, but it doesn’t convert to bottom line. Wild FCF. Not a fan of such companies.
Stratasys (SSYS): Looks like a no moat business with limited growth. Nothing outstanding that catches my eye.
AngioDynamics (ANGO): Medical device with 10 years of history but only the last two years have been good. Lots of share dilution 5 years ago, with high intangible assets. ROE ROA and CROIC all in the low single digits. Management isn’t effective.
Diodes Incorporated (DIOD): Made money during recession and latest year has been huge. Operating at the upper range of margins. Share count increases slightly each year. Revenue, receivables and inventory growth are aligned so the big increase isn’t a warning. Short term debt is high but has been reduced over the past 2 years. Capex has increased from $50m in 2008 to $90m in TTM which is causing intrinsic value to remain flat.
Anika Therapeutics (ANIK): mediocre company. Nothing special. No consistency, no proven management, no moat.
Allegiant Travel Company (ALGT): Travel company that provides chartered air services as well as operating a small fleet of planes. P/FCF of 14 is very high and all businesses related to airplanes is going to have high capex. Evident in FCF. Pass.
ICF International (ICFI): Short history with uptrend. Barely lost money in recession. Increased margins. Extremely high receivables and intangibles. Lots of acquisitions. Low CROIC and ROE of around 10% median over 5 years.
Comtech Telecomm (CMTL): Made money in recession and revenue growth is still impressive at 30% last year. Most likely due to an acquisition in 2009-2010. Increase in growth has led to inefficiency showing margin decrease. Net margin has taken a big drop. If company can get back up to upper range of margins, intrinsic value will be much higher. Share count has increased. Warning is that revenue grew 30% but receivables grew 70% in 2010. Even with 15% discount rate and 10% growth off conservative FCF, valuation is compelling. 5year CROIC is 12% and 5 year FCF/Sales is 13%. Cash converting cow. NCAV of $16.7 and NNWC of $14.5. Meaning business is being priced for about $10.
JDA Software Group (JDAS): Decreasing SG&A is always a good sign but so has R&D. R&D expenditure of 20% from 2006 down to 11% in 2010. Interest income is about 4% of revenue. For a software company, net margin is extremely low. Big increase in intangibles and long term debt. Not well management.
Rimage Corporation (RIMG): Burning CD’s is a dying industry. I remember reading somewhere that management is not shareholder friendly. Selling below tangible book value but very healthy balance sheet. SG&A has increased 8 out of 9 years. Net income decreasing. FCF is also volatile. Not a stable business. ROE,ROA,ROIC,CROIC all in mid single digits now. Has declined a lot. Won’t be able to pay back the opportunity cost.
ESCO Technologies (ESE): Company with a steady income statement. Nothing shouts out. Balance sheet does shout a few things. Doubling of intangible assets in 2008 which has increased vs depreciated. Debt to equity is on the high side.
Chase Corporation (CCF): Highly subject to cycles. Boring business but no moat. COGS has been decreasing since 2008 leading to higher margins. Seems to acquire businesses as growth is limited. ROE, ROA and CROIC was low during 2009 but has climbed back up. CROIC of 14% is very good.
National HealthCare Corporation (NHC): Healthcare center operating company. Always dependent on government. Unsystematic risk is too high. ROIC and CROIC too low with inconsistent FCF making it a diffcult one to judge immediately. Better healthcare operators out there.