3 Value Stock Ideas

As I mentioned a couple of days back when I discussed XOHO, I went through more than 80 stocks in one day in hopes of finding value to put my cash to work.

Of the 80+, I narrowed it down to 6 companies that I felt were pretty good businesses with sustainability. Not deep value or Graham net nets stocks I’ve been concentrating on since the downturn, but more towards Buffett type companies. Boring businesses with proven good histories but all trading at fair value. Boy it’s getting tough for value investors now.

I’ll briefly go through three and leave the remaining three for another time. Keep in mind that I’ve only spent about 20 minutes on each one so far. So if anything jumps out as I get deeper into it, I’ll write about it at a later time.

Quick Checklist for Great Business Valuation Metrics

• consistency
• positive and growing free cash flow
• stability in margins
• good balance sheet
• no debt issues
• able to generate returns

Granite Construction Inc (GVA)

A quick intro. to what the company does from the company’s 10-Q.

We are one of the largest heavy civil contractors and producers of construction materials in the United States. We are engaged in the construction and improvement of streets, roads, highways and bridges as well as dams, airport infrastructure, mass transit facilities and other infrastructure-related projects. We produce construction materials through the use of our extensive aggregate reserves and plant facilities. We also operate a real estate development company on a significantly smaller scale. We have offices in Alaska, Arizona, California, Florida, Nevada, New York, Oregon, Texas, Utah and Washington.

……

The three primary economic drivers of our business are (1) the overall health of the economy, (2) federal, state and local public funding levels, both nationally and locally and (3) population growth with the resulting private development. The level of demand for our services will have a direct correlation to these drivers. For example, a stagnant or declining economy will generally result in a reduced demand for construction in the private sector.

Current Price: $34.90

DCF Valuation: $31.47 - $34.78 (after adjustments to FCF)

Graham Formula: $59.70

Competitor Comparison: Current PE is relative to industry and peers

Comments: From what I’ve seen so far GVA looks to be run very well. The company has some great fundamentals.

• increase in gross profits even in 2007 and 2008
• other margins also increasing
• has been buying back shares the past year
• no intangibles on the balance sheet
• reduced debt to equity ratio
• good balance sheet
• tangible book value linearly increasing
• FCF has not been negative for the past 10 years
• bad point is that sales have slowed down for past couple of years

From the state of the company, management looks to be conservative but performs very well. Here’s a quote from their latest press release regarding the outlook of the industry.

“There will be some casualties in the industry. We are really watching our balance sheet. I do think there will be some shakeout before this is over.”

GVA’s operations in the west are currently being hindered by California’s budget issues which directly affects government spending.

Construction is not a pretty industry at the moment. Obviously it has been hit hard but that is exactly where the opportunity lies for value investors.

Comtech Telecomm (CMTL)

Comtech Telecommunications designs, develops, produces and markets products, systems and services for communications solutions. The Company conducts its business through three business segments: telecommunications transmission, mobile data communications and radio frequency (RF) microwave amplifiers.

Current Price: $31.79

DCF Valuation: $37.26 - $42.32 (after adjustments to FCF)

Graham Formula: $79.86

Competitor Comparison: Slightly expensive compared to competitors. Without a big moat, need to adjust back to competitor and industry levels. Should be around $26.

Comments:

• only one negative FCF year from past 10 years
• very good CROIC, a metric that shows management is doing a good job.
• able to convert 11c of every dollar in sales to FCF. Excellent. Haven’t come across many companies capable of this.
• top line sales growth and FCF growth is outstanding
• tangible book value has been increasing for past 6 years
• increasing margins
• big decline in debt to equity
• bad point is that CMTL has been issuing shares

American Railcar Industries (ARII)

American Railcar Industries, Inc. is a North American designer and manufacturer of hopper and tank railcars. The Company also repairs and refurbishes railcars, provides fleet management services and designs and manufactures certain railcar and industrial components.

Current Price: $8.26

DCF Valuation: $14.40 with 0% growth and 15% discount rate. Currently at about 40% margin of safety.

Graham Formula: $15.16

Competitor Comparison: Cheaper than competitors. Looks to be worth around $13.39 when compared with peers.

Comments: Of the three companies listed here, I like ARII the most.

• Per cash value of $12.41
• Rail related is always capex heavy
• Not an expert in analyzing rail yet but others have started it for me. Eric has written up the following posts on ARII earnings.
• Carl Icahn is also a big owner of ARII. Need to figure out his intentions in the company.
• The company owns shares of Greenbrier (GBX).. anyone know if there is a chance of a buyout or merger?

Disclosure: No positions in any stocks mentioned.

Comments

[mdpath:]

I'm always skeptical of writers who tout stocks but have "no position".

Aug 04 10:07 AM

[Jae Jun:]

Never said to buy them. They are also at fair value meaning I wont be buying it without a margin of safety.

These are my ideas only and should be taken with a grain of salt.

Aug 04 11:04 AM

[CNGfamily:]

I'm confused... your CMTL chart only shows thru Aug 2008... CMTL has been a bit volitile since then

Aug 04 11:40 AM

[Jae Jun:]

Seems like I made an error in the date range and cropping of the image. Thanks for noticing. Fixing it on my blog.

Aug 04 01:02 PM

[Asquared:]

ARII looks interesting. I'm no expert in this field either. It appears that the vast majority of the cash sitting on the balance sheet came from a bond offering the company did back in 2007. Perhaps that is a sign that this management saw a decline coming and go the cash while they could. The debt comes due in 2014 and is rated B3/BB- (junk category, but close to investment grade). The bond has traded as high as 104 near the origination date and got as low as 70 during this recession. It's now around 90 or 10% yield.

One analyst report I read said the last quarter saw 0 orders! In other words, their entire production came from backlog. They only have 2 quarters of backlog left. So, it is a race to see how fast the economy turns around and thus orders rise and how fast they'll eventually grind through cash if the turnaround doesn't happen soon. Presently, it doesn't appear to be burning through cash as the backlog orders were right around cash flow neutral.

Will look forward to reading what else you find on this one.

Aug 04 01:55 PM

[Jae Jun:]

Thanks for the additional info Asquared. It seems like you've gone through more material than I have.

Aug 04 11:57 PM