20 Stocks Round 2

Written by

Jae Jun

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Well it seems like most of you like the quick short stock analysis style. Although I don’t get into deep details, you should be able to see a pattern of the  specific things I look for in a company at first glance.

Here is the next round of 20. When I’ve completed going through the entire 200 list, I’ll put up a nice and neat spreadsheet so that you can track it yourself. For now, let’s just get rolling.

20 Stocks Round 2

INSU: another industrial company in the list. When economy is good, these companies do good business. Cyclical. Requires high capital expenditure and long term debt is increasing. Share count has increased consistently as well.

SHEN : telecomm network company. High fixed capex. big increases in debt. big drop in margins. large acquisition leading to high intangibles or is it from spectrum holdings?

LL: lumber liquidators. specialty store. FCF losses. Owner earnings would be the better way to analyze. Cash flow from other is quite high. inventory turnover and age of inventory keeps increasing.

RENT: latest fiscal year shows increase in revenue and drop in COGS, but ended the year at a loss. Low moat business. Pass.

ATNI: makes a lot of money but doesnt looks like company will find it hard to earn more than the cost of capital. High fixed capex. EPV < Repr meaning the company does not utilize its assets. Issued a lot of debt recently.

AIRT: Very cheap based on numbers. P/tangBV = 0.7 but no opportunity for growth. Largest company is fedex. Trading below NCAV. Value trap imo.

UEIC: Interesting potential. No moat OEM business. Large increase in net receivables and inventory but looks like sales picked up. Need to look at detailed inventory. New short term debt with no LT debt could mean that they had a big order and needed financing to make the order. Gross margin of 31.5%, EBIT of 5.5%

HCSG: EPV > 2x Repr means there is a possibility of a moat, but the current price seems too high. F score of 7 shows that company is healthy. FCF past 5 yr averages drastically lower than past 10 yr avg but other ratios have increased by 1% or so. P/FCF is very high. Intrinsic value looks much lower. Pass

AACC: classified as financial company. Outside of circle of competence.

DDE: Don’t want to help gambling companies.

NCI: Margins declined for 3 years. Due to recession, consulting business not good. Big drop on cash. Only $0.4m left compared to $49m in 2009. For consulting, liabilities make up 47% of balance sheet. Days Payable Outstanding is 8. Very likely leading to liquidity issue.

MED: Good margins for a distributor. Lots of SG&A involved with business. Verify they are viable. Margin trend has been increasing 2009 and up. Increasing share count. Big increases in cash. Very healthy. Shareholders equity increased 10 yrs. FCF +ve from 2008-2009. Looks like a great turnaround. Increase in DPO and inventory turnover. However, there is no moat.

PRFT: Ignoring 2009, margins have dropped nearly every year. Along with tight margins, this is a difficult business to run. Acquisitions every year. Pass.

SUPX: No long term debt. Good margins for semiconductor equipment manufacturer. Constantly needs to update products to keep up to date with new processes. FCF matches owner earnings well which means the financial is very clean and easy to understand. 5yr metrics are worse than 10yr. Mostly likely due to rapid changes in industry. Difficult industry.

AAON: Serves commercial market for air cons and replacement parts. Did well in recession but going down for 2 years. Looks like down cycle where cycle lasts for ~3years. Looks well managed. Repays debt, no LT debt, buys back shares. Not too sure about buying shares at high prices though.

LDR: ROE, ROA, ROIC, CROIC in constant decline. Company has a liquidity issue. Cash conversion cycle is bad for the balance sheet it has.

EXAC: top line growth but doesnt convert to bottom line. FCF very inconsistent. Large increase in long term debt. 1% CROIC.

DRIV: Went from average of 12% Operating margin to 3.6%. Huge increase in LT debt. From $8.8m to $354m. Not much growth in shareholders equity since 2007. New acquisitions every year. Lots of intangibles.

NPK: Accounting is very straight. Easy to understand. Business has greatly improved since 2006-2007. Getting towards high operating efficiency. Did well even in recession and current year. Good margins. Large increase in receivables and inventory from 2006-2007 looks to have been solved now. Solvent with no short term or long term debt. Retained earnings and shareholders equity has increased for 10 straight years. Annual dividend of 8%??? Valuation looks excellent.

QLGC: Cyclical business but profitable. Growth is limited but it looks like the business is solid. Good balance sheet, 5yr ROE 15.3% and 10yr ROE is 16.7%. EPV is > 2.5x Net repro value which suggests that a moat does exist. Hard to predict earnings or fcf because it is erractic but worth another look.

KNX: Truck logitics company. Very erratic. Hard to value. Dependent on gas prices and economy. Pass.

The two that caught my eye is MED and NPK. I especially like NPK but wish it would go down more.

Disclosure: None.

  • wsm

    I also like NPK a lot (and own some shares).

    Have made an estimate (or a potential range) of what you foresee as the impact of the future drop-off in the ammo business?


  • wsm

    Have you* made an estimate, is what I meant to say.

  • Dan Synek

    NPK is short candidate in value investors club.
    Please omment on their writeup:

  • thanks for the link. The writeup was done when NPK was at $116 so it’s a completely different story now. I don’t think it is a short at these prices. Any lower and it’s very much a buy in my opinion.

  • wsm

    @ DS –

    I agree with Jae here – at $115, the short case was there. I read the link, I think it is actually a pretty decent short thesis (again, considering that NPK was around $115 at the time).

    A lot of the items have actually played out (and many have not). Margins have come down a bit, as predicted. They are now in the 16-17% range on a consolidated EBIT basis for YTD 2011, down from the 20+ levels, as predicted in the short thesis. I would suggest that most current holders (and shorts) of the stock are very well aware of the impending shrinkage in military revenues and overall margins.

    I ran my own model for the company, taking into account many of the issues raised in the short thesis. Looking at 2012, I assumed the munitions revenue would be roughly cut in half from 2010 levels, applied no growth to the appliance segment, and applied 5% growth to the absorbent segment (for which they are expanding capacity), and gave those overall revenue results a 15% EBIT margin. This yielded 2012 estimated EBIT of ~$58M. Applying a conservative 10x multiple to that gives you stock price of $85. Also assuming that they pay out dividends of roughly 45% of 2011 EBIT in 2012 (consistent with prior 3 years), you’re getting a dividend yield of 4.5%-5.0%.

    Needless to say, it is no longer a screaming short here. I would argue it becomes a buy if it dips below $80. Below $70 it is a no-brainer.

  • wsm

    Jae – how come the comments are not working? I have tried to post 2 responses to DS’s comment, one yesterday and one today, and they are not appearing on the site.

  • looks like the site thought you were spam for writing so much 🙂 I approved the comment now.

  • tony clayton

    I’ve got a value investing question I was hoping you might be able to answer although it’s somewhat unrelated to your post so if this bothers you then obviously feel free to delete this and move right on.
    Alternatively, I’d appreciate some insight regarding Leucadia National. I’m relatively new to value investing and LUK clearly have the whole “mini-Berkshire” thing going on though there are a couple of clear differences to be sure.
    What I’m wondering mostly though, is what their P/E ratio is? Basically, the NYTimes business site as well as Yahoo and Google Financial all put it around 2 or 3 while a number of other sites put it at around 7 or 8.
    Is this just me or am I missing something important here? Furthermore, if it is actually around 2 or 3 then surely even with the few difficulties they’ve had, the management of LUK can’t have become useless value investors overnight and this must be a very good price for guys and a company with such a great history of honest, competent management.
    Any input on this would be much appreciated if you should decide to respond here or via email.
    Best Regards,
    Tony Clayton.

  • If you just wanted to get the PE, then the easiest way would go to the SEC and get their latest annual report and find the EPS or get the latest 4 quarters and sum up the EPS. Then divide by the current market price to get the correct PE. If EPS is negative, then there is no PE.

  • Tony

    Thanks, much appreciated.

Ready to try Old School Value?