There's Value in Value Line Shares

Value Line (VALU) provides investment advisory services to mutual funds, institutions and individual clients, and publishes investment-related periodicals. The company's Value Line Publishing subsidiary publishes investment-advisory publications that evaluate common stocks, options, mutual funds, and convertibles. In addition, Value Line produces investment-related software. The company also manages a family of mutual funds, as well pension funds and institutional and individual portfolios through Value Line Asset Management (company description from Morningstar).

This old-line company is a staple of investment information found in virtually every brokerage office, library, hedge fund company, and in the homes and workplaces of individual investors throughout America. Whether or not you agree with its ‘timeliness’ system for stock picking most serious equity researchers will at least consult the latest Value Line report on a stock before making their buy/sell decisions.

The company is completely debt free and has been such a great net cash generator that in 2004 it paid an $18.50/share special distribution. Since then the annual dividends have progressed from $1 in calendar 2005 to $1.05, $1.20, and $1.40 in calendar 2006-2007-2008. At the current quarterly rate of $0.40 the annualized rate is now $1.60/share for a very generous (and well covered) 6.8% current yield.

While many companies are struggling to maintain their earnings Value Line has shown steady, if unspectacular, EPS gains in each fiscal year since 2003.

Here are Value Line’s per share figures since FY 2003 [FYs end April 30]:

FY ……. EPS …… Dividend ……Avg. P/E …..Year-End Yield

2003 ….. 2.00 ……… 1.00 ……….. 21.7x ……….. 2.10%

2004 ….. 2.04 ……... 18.50 ……….. 18.2x ……….. NMF

2005 ….. 2.14 …….... 1.00 ………. .17.1x ……….. 2.54%

2006 ….. 2.35 …….... 1.05 ……….. 18.5x ……….. 2.83%

2007 ….. 2.47 …….... 1.20 ……….. 16.5x ……….. 2.31%

2008 ….. 2.56 …….... 1.40 ……….. 12.0x ……….. 2.95%

In the six months ended October 31, 2008, Value Line posted EPS of $1.56 versus $1.23 making trailing 12-month earnings $2.89/share. At yesterday’s close of $23.50, the P/E is now just 8.13 and the current yield is an outstanding 6.8% while CDs and T-bonds are paying 2-3%.

Net profit margins have ranged from a low of 23.2% (FY 2002) to as high as 35% (FY 2000) over the past 10 years. ROE has been running between 29.1% and 48.3% since the special dividend payout in 2004. Return on Assets has ranged from 18.5% to 21.6% since then.

As of October 31, 2008 the company held over $39 million in cash against zero debt and with just 9.98 million shares outstanding.

VALU shares hit a new decade low in yesterday’s trading. At less than half price, and with more than twice its typical yield, I see little remaining downside to these shares. Value Line has just one main competitor (Morningstar) and they have been peacefully coexisting for quite some time without either one threatening the other’s profitability.

A return to even the low end of Value Line’s previous stock price valuations would lead to a better than 50% total return from today’s quote. If the market mood picks up, a double within a year or two does not seem out of the question.

Disclosure: Author bought shares of VALU yesterday (March 12, 2009).

Comments

[Owen:]

Good analysis. However, the author neglected to mention the extremely poor liquidity of this stock. Average daily trading volume is under 4,000 shares, and bid/ask spreads are often around $0.50, or over 2%. If you plan to buy and hold for years, this isn't a big problem, but for a shorter holding period, that's a sizable haircut if you're forced to sell in a hurry.

Mar 13 02:09 PM

[Marcap:]

I guess its not surprising that there is such poor liquidity in Value Line's shares, given that over 86.5% of outstanding shares are held by insiders, and they do not appear to be selling at the moment. In fact they have not been selling for at least the past couple of years. Gee, I wonder how many outsiders they get at their annual shareholders' meeting?

In any event, I do find it interesting that they appear to have paid a special dividend of $17.50 back in May 2004. Now that would be a real nice catch if it happened again. Other than that, as you say, this is a long term stock with not much action. But with a 6.8% dividend, it may indeed be worth buying and holding for a few years, especially given how solid the company looks.

On Mar 13 02:09 PM Owen wrote:

> Good analysis. However, the author neglected to mention the extremely
> poor liquidity of this stock. Average daily trading volume is under
> 4,000 shares, and bid/ask spreads are often around $0.50, or over
> 2%. If you plan to buy and hold for years, this isn't a big problem,
> but for a shorter holding period, that's a sizable haircut if you're
> forced to sell in a hurry.

Mar 13 07:36 PM

[AspiringCFA:]

The author needs to read the complete 10Q. Two senior officers invoked their 5th amendment rights - Why? Invest in this stock at your own considerble risk. Lots of serious issues that the author didn't point out. Very poor research indeeed. The following is from the latest 10Q filed 3/3/2009.

Note 9-Contingencies:

By letter dated June 15, 2005, the staff of the Northeast Regional Office of the Securities and Exchange Commission ("SEC") informed the Company that it was conducting an informal inquiry primarily regarding the execution of portfolio transactions by VLS for the Value Line Funds. The Company thereafter supplied numerous documents to the SEC in response to its requests and various employees and former employees of the Company provided testimony to the SEC. On May 8, 2008, the SEC issued a formal order of private investigation regarding whether the VLS brokerage charges and related expense reimbursements during periods prior to 2005 were excessive and whether adequate disclosure was made to the SEC and the boards of directors and shareholders of the Value Line Funds. Thereafter, certain senior officers of the Company asserted their constitutional privilege not to provide testimony. Management believes that the SEC has completed the fact finding phase of its investigation and the Company has been in discussions with the staff of the SEC in an effort to settle the foregoing investigation. There can be no assurance that the Company and the SEC will be able to reach a mutually agreeable settlement. Although management of the Company cannot determine the effect that the investigation will have on the Company’s financial statements, in light of settlement discussions to date, it believes that any settlement is likely to be material.

On September 3, 2008, the Company was served with a derivative shareholder's suit filed in New York County Supreme Court naming all of the Company's Directors and alleging breach of fiduciary duty and related allegations, all arising from the above SEC matter. The complaint seeks return of remuneration by the Directors and other remedies. Plaintiff's counsel has agreed from time to time, most recently until April 1, 2009, to extend the defendants' time to answer, move, or otherwise respond to the complaint. Based on an evaluation of the case at this early stage, including communications with the Company's insurance carrier, it does not appear that the case will have a material impact on the Company's financial statements and the Company has not recognized an accrual for this contingency

Mar 16 08:42 AM

[Paul Price:]

Based on an evaluation of the case at this early stage, including communications with the Company's insurance carrier, it does not appear that the case will have a material impact on the Company's financial statements and the Company has not recognized an accrual for this contingency.


That sounds like old and not too important news. Almost every large corporation has legal issues pending at any given point in time.

The shares have rallied very nicely since my write-up.

Mar 16 10:16 AM

[AspiringCFA:]

You need to do some more research. There are two actions.

Referring to SEC investigation the company reports:

"Although management of the Company cannot determine the effect that the investigation will have on the Company’s financial statements, in light of settlement discussions to date, it believes that any settlement is likely to be material."

Referring to derivative lawsuit the company reports:

"Based on an evaluation of the case at this early stage, including communications with the Company's insurance carrier, it does not appear that the case will have a material impact on the Company's financial statements and the Company has not recognized an accrual for this contingency."

Two different matters entirely. The first is "likely to be material." I would be careful that you don't not mislead.

Mar 16 11:58 AM

[nyka:]

Check out the latest earnings report, which is actually shouting to would-be buyers, "STAY AWAY!!"

Mar 27 02:31 PM

[Graham Jervis:]

Did they recently reduce their dividend? or that is hearsay?

Apr 21 01:45 AM

[alsilv:]

The May 14th div'd was reduced to 30c. What a sh~t show.

Apr 21 10:29 AM

[U Dontknow ...:]

ValueLine shares hit $34.56 today with the DJIA down 130 points.

Jul 07 03:34 PM