Stock forum

1st Quarter numbers are out:

http://www.sec.gov/Archives/ed…..ex99_1.htm

Good margin improvement and cost containment.  Improved cash position. Sales were down across most product segments but the CEO expects improvements in 2010.  

From the report:

Outlook for Fiscal 2010

“We are pleased with the progress we have made in improving our manufacturing efficiencies over the past year,” commented Mr. Ferguson. “These programs have been responsible for reductions in material scrap rates, labor and overhead costs that have improved our operating profit and expanded our gross margin. We expect to leverage these manufacturing efficiency gains as our medical and custom products sales increase.

“Based on input from customers, prospects and our sales team, we are just now beginning to see signs of strength returning to our markets,” said Mr. Ferguson. “We are not able to accurately predict when our sales volume might pick up, but we believe we will see gradual sales improvements during the remainder of the fiscal year. We will also continue to focus on earnings performance, being mindful of potential cost increases as the economy gains momentum.

“We are using our excellent cash flows and strong financial condition to invest in research and development projects even though the current economy remains soft,” continued Mr. Ferguson. “We believe our focus on developing new products and upgrading existing products will strengthen Span-America’s competitive position as the economy improves,” concluded Mr. Ferguson.

Jae,

SPAN had an impairment charge of $2.7m in 2007 after exiting the safety catheter business they had bought in 2002.  I believe this would change the numbers a bit but am not sophisticated enough to understand exactly what this means.  From their 2007 10-K: "Net income, which includes results from the discontinued safety catheter segment, was up 69% in fiscal 2008 to $4.9 million, or $1.70 per diluted share.  The increase in fiscal 2008 net income was caused by our exit from the safety catheter segment in early fiscal 2008 and the resulting decrease in losses from the now discontinued operation."

It seems like the catheter business was a losing one – and might also explain the large increases in capex during the time period.  Without that business, it might seem that their core business function on a much lower capex number? 

Using your adjustments but a 14.8% growth rate, I come up with a fair value between $20-$25 for the various methods.  It seems it would be a great value under 10, and a so-so value around 15.

So the major factor, as usual, is the growth rate.  I'm eager to hear about your new CROIC method.  I generally use CROIC as a ceiling for the growth rates I use in the calculations (even if the median growth % is much higher).  Is this generally a sound strategy?

Live and learn!  I really enjoy typing up my analysis and working through the numbers to make sure I'm somewhat rational in my thinking.  I have a number of other ideas but will go back and double check my numbers.  Don't want to clog up the boards with so-so ideas!

Post edited 1:05 am – January 18, 2010 by DrSues02

Jae,

Thanks for taking a look!  I really like reading your modifications to the spreadsheet numbers as it is my biggest area of weakness. A few questions:

1) Why the adjustment of FCF to 3m? 2009 numbers were at 5.2 million and based upon the history from the past 2 years, the number should slightly increase even if sales stay the same.

2)  I'm using the newest version of the spreadsheet and I keep coming up with a median CROIC of 14.8%.  Are you using a different calculation (outside of the spreadsheet) to come up with the 7.2% growth rate number?

3) For the Graham value, 2007-2009 EPS was an average of 1.46.  I chose 1.2 to try to be conservative.  How did you choose 1.28?

Very curious to read your thought process behind the adjustments so I can improve upon my own thinking & analysis.

Post edited 3:15 am – January 13, 2010 by DrSues02

2nd writeup ever so please keep up the constructive criticism.  See my other post here: http://www.oldschoolvalue.com/…..rporation/

SPAN manufactures and distributes a variety of therapeutic support surfaces and related products utilizing polyurethane and other foam products for the medical, consumer and industrial markets.  The company has been around since 1970 and holds 34 patents.

The business can be broken into two categories: medical bedding (think hospital beds with specially designed polyurethane to prevent sores and other complications) and custom products (which includes both consumer contoured matress pads and an industrial segment).  The custom product seems to be growing – currently 32% of sales – with the majority of revenue in this category coming from one large customer. 

Good:

• SPAN has no long-term debt and has been FCF positive for 9 out of the last ten years
• ROE (TTM) – 24.82, ROI – 19.7, and ROA – 15.86 are very very good
• Gross margin has been steadily increasing since 2004 and is the highest yet.  Both operating and net margins are slightly off of 2008 numbers but are still a huge improvement on average
• SPAN is slowly purchasing back its own stock and has increased its stock repurchase plan to almost 10% of outstanding shares
• SPAN has been paying a quarterly cash dividend for the past 19 years, and raised it a penny in both 2008 and 2009 in the midst of the recession

Value Calculations:

DCF:

15% discount rate, 15% growth rate – Share Value: $31.89, MOS: 47%

- Lowest 3-yr FCF growth rate is 30%.  15% matches up nicely with the median ROIC.  0% growth results in a share value of $18.63. 

Graham:

15% growth, normal earnings of 1.2, Share Value: $25.11, MOS: 32%

Graham Modifed for 2007-2008 EPS levels:

15% growth, normal earnings of 1.6, Share Value: $34.27, MOS: 50%

-Company had a large increase in earnings in 2008 and managed to sustain nearly this level in 2009.  This is an optimistic assumption that they can sustain this new 'tier' of earnings.  Is my thinking way off with this?

EPV: 9% discount rate, normalized income of 6.2, Share Value: $23.14, MOS: 27%, Net Reproduction Cost is $11.17

-Company has a decent moat based upon EPV even though their management analysis in the SEC filings doesn't seem as helpful.

Low End: $23

High End: $30

Current Price: $16.72

Risks:

• Management analysis in the recent 10-K looks like 2010 will be roughly the same in sales due to the loss of a large customer ($2M) in the custom products segment.  However, from management was able to increase FCF in both 2008 and 2009 despite a 2%, and 6% reduction in sales
• The loss of SPAN's largest customer in the custom products segment would severely hurt sales
• Product line-up is threatened by new and improved mattresses and support systems that don't require therapeutic support surfaces

I bought at $15.40 back in October (verifiable via Covestor) and just missed out on picking it up around $13 earlier that month. 

Thoughts?