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Some of the simplest analysis guidelines turn up investment jewels. A lower price-to-earnings (P/E) ratio for a company, when compared to its industry average, can be an indication of an undervalued stock price. When a stock's P/E ratio is compared to its EPS growth estimate and the resulting quotient is less than a whole of 1, it can point to an undervalued stock based on earnings performance. A debt-to-equity ratio reflects how leveraged a company is. Finding a company with a low ratio or no debt can be a evidence of a well-managed business.

A well-managed company with an undervalued stock price and alluring growth estimates could well be a diamond in the rough. On the other hand, there could be a legitimate reason the company's stock price does not reflect the expected value of respectable fundamental measures. The key is determining which factors are actually shaping the stock price.

Apple (AAPL) fits the model of a company with a P/E ratio less than its industry average, a PEG less than 1 and no debt. This won't be yet another article trying to explain the factors that are or are not shaping Apple's stock price. There are another few dozen companies that also fit the model. Four of those companies are household names like Apple. The four are Winnebago Industries (WGO), PC Connections (PCCC), Pier 1 Imports (PIR) and Select Comfort Corporation (SCSS).

Company

P/E (TTM)

5 Year EPS Growth Est.1

PEG

Debt to Equity

YPEG

based on 2014 Est.

Current Price 3/8/13

Potential

Price

Appreciation

Apple

9.79

19%

0.51

0

$966.72

$431.72

124%

Winnebago

12.00

49.60%

0.24

0

$46.62

$21.18

120%

Pier 1 Imports

13.32

18.9%

0.70

1.96

$26.65

$22.24

20%

PC Connection

12.58

25.00%

0.50

0.34

$35.50

$15.60

128%

Select Comfort

13.25

18.6%

0.71

0.06

$38.13

$18.15

110%

1Estimates from Thomson Reuter's StockReports+

Based on the potential for price appreciation, Pier 1's current stock price is somewhat in range of a fair value. The other three warrant further analysis to determine if, perhaps, there may be a jewel amidst the group.

Winnebago
Winnebago is not only a recognizable name; there are actually people who believe all motor homes are a Winnebago similar to the notion that all tissues are Kleenex. Because of that concept, it is ironic to discover that Winnebago holds barely 20% of the market share of the recreational vehicle [RV] industry. To its credit, in 2012, from an overall perspective, it moved from the #3 spot to the #2. However, in Canada, it slipped from the #2 spot to the #3.

The recent economic conditions definitely have not worked in the RV industry's, thus, Winnebago's, favor. Revenues for Winnebago from 2005 to 2007 averaged just over $900 million annually. The drop in 2008 was 33%, which was mild compared to the subsequent 67% drop in 2009. In the same time frame, gross profit margin dropped from a double-digit percentage to a single-digit. Recovery started in 2010, but revenues have still not recovered to even the 2008 levels. Revenue for fiscal year 2012, ending August 31, was nearly $582 million. Gross profit margin was 7.5% compared to 2005's high of 13.8%.

Winnebago noted an improved retail market during its first quarter 2013 earnings release. The twelve month period previous to November 2012 showed a healthy 13% increase in the number of retail registrations for motor homes. Winnebago introduced a new towables product line in fiscal 2012, including the Lite Five, the Minnie Winnie and the Ultralite. It received positive reviews and boasted Best in Show recognition from the national trade show in December. As overall demand started to increase, Winnebago expanded its production schedule and expects to continue to expand it through the second quarter of 2013. Incentive sales played a strong role during the second quarter of 2012, but are not expected to play such a role in 2013, assuming the sales trend stays robust.

It should be noted that, although Winnebago is seeing improved conditions, it is still "looking at a market that is dramatically smaller overall". Winnebago primarily sells to the 55 and older crowd. Before the housing crisis, there were indications that a younger customer demographic might develop. This supplemental market has not yet re-emerged.

During the first quarter earnings release conference call, an analyst jokingly said people thought Winnebago might be "dead" during the recovery years since 2009 and congratulated management for proving to those people that the thought was premature. Randy Potts, CEO and president, ended the call by saying

There's optimism in the air here at Winnebago Industries......We also believe we are seeing positive signs in the marketplace.....The RV market continues to recover.

PC Connection
PC Connection strives to be a primary rapid response provider for complete IT solutions to consumers, small businesses, corporate businesses and government agencies.

On January 31st, 2013, PC Connection reported 2012 full-year results. While revenue increased just 2.6% over 2011, gross margin improvements resulted in an earnings per share increase of 19%. Even though the overall demand was soft, PC Connection generated $70 million in cash. It used part of the cash to pay a special dividend to shareholders totaling $10.1 million and to purchase back $6.3 million of common stock. Another portion of the cash funded capital expenditures. PC Connection also tightened inventory levels resulting in an $8 million decrease.

The accessories, notebooks, and software categories led the improvements in revenues in the fourth quarter. Memory and printers logged double-digit percentage decreases. Notebooks provide the largest sales category for PC Connection. And, that category increased despite a decrease in average selling price. Software sales increased primarily due to the demand in large corporate accounts for virtualization and security products. Small businesses spent more in 2012 compared to 2011. However, consumers spent less dragging the overall segment to a 2% decrease. The large corporate and public sector accounts outspent 2011 in 2012 by 9% and 3% respectively. Purchases from customers in the Healthcare industry provided the largest gain. Yet, small business and consumer purchases provide the largest gross margins.

The focus in 2013 will be on growing revenues by delivering a broad offering of products and by increasing market share. PC Connection will continue to invest in cloud computing solutions. Market research predicts 2013 IT spending will grow slightly over 2012 at a 1.7% pace. PC Connection targets doubling the rate of GDP or IT spending projections.

Select Comfort
Select Comfort is the designer, manufacturer and distributor of Sleep Number products, primarily adjustable-firmness mattresses. The Sleep Number brand produces retail sales per square foot in the #6 sport behind only Apple, Tiffany, Lululemon, Coach and Michael Kors.

From 2009 to 2012, Select Comfort saw healthy increases in sales, operating margin and earnings per share. EPS grew over 500% from $0.24 in 2009 to $1.47 in 2012. Building on that established trend, Select Comfort plans to grow sales to $1.5 billion and operating margin to 15% by 2015. Accomplishing these goals are projected to result in earnings per share growth of 20+% each year through 2015.

Select Comfort is marketing to expand its customer demographic. The established demographic is 45 to 65 years old and older and they buy based on need. The target market is four times the size of the established market. The broadened campaign reaches those 30 to 54 years old and highlights the health benefits of the Sleep Number product.

In January, 2013, Select Comfort acquired Comfortaire, the 2nd largest adjustable bed company. The acquisition deepens Select Comfort's intellectual property, which helps solidify its competitive position in the industry. And, because Select Comfort strives to be self-funding and has a strong cash balance, the acquisition did not result in the company incurring any long-term debt.

Retail operations will contribute to the goals of 2015 in three ways. First, Select Comfort expects to open an additional 90 stores in the next three years, growing the count from 410 to 500. Second, some stores will be relocated to non-mall locations, because square footage can be doubled for the same fixed costs. Third, stores remaining in malls will be remodeled. At present, 50% have been completed with a goal of completing 90% by 2015. Again, capital expenditures for the retail growth and changes are to be funded with cash.

Conclusions
The potential jewels include:

  1. a company selling very high-dollar, discretionary recreational vehicles to a small demographic in an industry showing some positive signs of recovery or
  2. a company selling a broad range of products to an universally large demographic in an industry showing minimal growth and demand or

  3. a company selling a above-average priced discretionary product to a hopefully growing demographic in an industry where demand is based on educating the consumer.

Of the three, PC Connection is the company most likely to expect sales, but whether it will be at the same or an increased level is questionable. Therefore, growing EPS at a 25% rate for the next five years seems more than hopeful. Winnebago and Select Comfort both offer expensive products. Select Comfort makes a case that its products are necessary for health benefits. Its track record of EPS growth the past five years at 19.06% weathered a financial crisis, and one could conceive that it will be able to continue in the range of 17%-20% for the next five years. Trusting Winnebago to grow EPS nearly 50% a year for the next five might be reasonable if the base amount started at mere cents.

The next table plots the path ahead accounting for each company's EPS long-term growth rate. The estimates for 2013 and 2014 are taken from S&P Capital IQ. The 2017 amount is extrapolated based on the 2012 amount and the growth projections. Apple is included as a gauge.

Company

Projected Growth Rate

2007 EPS

2012 EPS

2013 Estimate

2014 Estimate

2017 Calculation

WGO

49.60%

$1.32

$0.25

$0.80

$0.94

$1.87

SCSS

18.60%

$0.57

$1.43

$1.71

$2.05

$3.36

PCCC

25.00%

$0.85

$1.27

$1.32

$1.42

$3.88

AAPL

19.00%

$3.93

$44.15

$44.65

$50.88

$105.36

It is understandable why Winnebago, Select Comfort and PC Connection are not trading at a value integrating a high growth estimate. Each has an extenuating circumstance or marketplace challenge impacting its stock price. It's not to say there isn't a jewel or two or even three in the bunch. Henry Kissinger said "A diamond is a chunk of coal made good under pressure". While every diamond starts as coal, every piece of coal doesn't end up a diamond. Certainly, Winnebago, Select Comfort and PC Connection face pressure ahead. But, there is no guarantee the upshot for the three is jewel classification.

I belong to an investment club that owns shares in Apple.

Source: Double-Digit Growth Doesn't Guarantee An Investment Jewel