The recent run-up in equity prices has put many investors in a position where they would like to take some profits. At the same time, it's not easy to sit on the sidelines and watch the markets rise further. For this reason, it's important to look at companies which are below their all-time highs, and still offer value at the current market levels. One of the remarkable aspects of this rally is how top-line numbers are flat, yet corporate efficiency along with share repurchases have boosted bottom line earnings per share. We have not seen bullish corporate investment as companies sit in cash, nor has the job market recovered completely. The recovery has not had the trickle-down effect yet as much of the middle-class has been sitting in cash after getting burned in the last rally.
I personally have been tweaking and rebalancing my portfolio over the past few months, and I've come up with a handful of companies, which unlike the markets, are below their all-time highs. I made sure to limit the list to companies that have strong fundamentals, and that have enough liquidity to handily get through a market crisis.
Babcock & Wilcox (BWC)
BWC has 140 years of experience providing utilities with critical components and engineering services. Additionally, the company isthe sole supplier of nuclear power generators for use in U.S. military applications. BWC also stands to gain from the phasing out of older nuclear reactors, conversions from coal to natural gas and environmental regulation. The company is developing innovative small modular nuclear reactors, which in turn may drive revenues for the long term. Although this company is near to its all-time high, it still offers a lot in terms of value. The shares may be undervalued by as much as 40%. Even in a worst-case scenario, there are no long-term pressures facing this company. Management has forecast higher revenues and margins, and new cost efficiencies should also be an earnings booster down the line. David Einhorn's fund has a significant position in this company as well.
In the company's May 2013 presentation, management guided for $3.4-3.55 billion in revenues and $2.25-2.45 adjusted earnings per share. Assumed is a market return of 11% and steady margins at the 2013 level. Projecting future cash flows and consistent revenue growth going out to 2018, the implied share price is $43.40. With the lower numbers from management's forecast, the shares are still worth over $38.64.
For further in-depth analysis see this article.
|Babcock & Wilcox|
|Implied Fair Value||$43.40|
Mueller Water (NYSE:MWA)
Mueller Water is the specified manufacturer of water infrastructure components including piping and fire hydrants in the 100 largest metropolitan areas of the United States. Back in 2006, the company was spun off from Walter Energy (NYSE:WLT) and was saddled with a huge amount of debt. The collapse in the housing market in 2008 caused shares of Mueller Water to tumble from $19 to about $2, and analysts feared insolvency. In the meantime, management has aggressively paid down most of that debt, and has engineered a return to profitability after some restructuring. Meanwhile, the American water infrastructure will need over $200 billion in investment over the next few decades, and Mueller is in a great position to capture a large amount of that investment. Any domestic pipeline approval in the oil and gas industry will also drive revenues. Additionally, Mueller is growing its services segment, which provides inspections using patented robotics platforms to municipal customers.
Looking at Mueller's fundamentals, the first item which stands out is the sharp increase in backlog from $6 million in 2011 to $86 million in 2012. This indicates significantly rising current and anticipated long-term demand for products, especially considering the 9-month turnaround time. Looking at the most recent numbers, finished goods remained flat as a percentage of total inventories indicating that the increase in product manufactured is actually being sold.
Presuming no change in market share, and steady profit margins at 5%, revenue growth of 10%, and a 11% market return, along with a declining PE multiple of 20X earnings, the stock is slightly undervalued at today's levels, with an implied share price of $$8.10. Any shift from fiscal tightening, and investment in infrastructure will increase revenues along with share price.
For in-depth analysis see this article.
|Market Cap./EV||1.2B/ 1.8B|
Dolby Laboratories (NYSE:DLB)
Dolby Laboratories operates in three segments, the largest of which is a patent licensing business for audio encoding and decoding software. Shares are flat due to worries with regards to declining PC and optical media sales. However, the company has been successful in numerous transitions before, and seems to be keeping up with the new mobile media markets as reported in the most recent 10-K. The company generates excellent cash flow and has no debt. Additionally, Dolby has returned capital to shareholders in the form of special dividends and share repurchases. The trend towards media streaming will likely increase demand for Dolby's encoding technologies, and the expanding market of high-definition theater also adds upside. Additionally, Dolby's software and devices are the industry standard across many of its customers' industries, which gives it a competitive advantage and a de facto monopoly.
Discounting cash flows looking forwards for five years implies a share price as high as $44. This valuation assumes weak earnings this year of $178 million by reducing profits 27% year over year (although fiscal quarter one and two have only shown 25% declines) and then a return to historical 5-year earnings growth of 14.5% followed by a 1% annual decline in the subsequent three years. Assuming a historically low 18.5X PE exit multiple and discounting by 9%, which is a conservative expected market return considering Dolby's unlevered beta of .91, the shares are undervalued by 29%.
For in-depth analysis see this article.
|Market Cap/EV||3.41B/ 2.99B|
|Implied Value $44|
Many investors were burned, but the huge tumble in Crocs' share price for $70 to under $3 just a few years ago. The avoidance of this company has opened up an opportunity for investors to purchase a growing company at a value price. Keep in mind that Crocs is no longer an ugly-clog company. The company has diversified and now has a full lineup of casual footwear. In terms of hard metrics, the company has excellent international growth, great margins, excellent cash flow and rising popularity in Asian-Pacific markets. The balance sheet is rock solid with plenty of cash and minimal revolving debt. An inflated earnings forecast has caused the shares to drop by 20% today, giving investors a great opportunity to build a position.
Ultra Petroleum (UPL)
Ultra Petroleum is a natural gas exploration and production outfit with one of the lowest cost structures in the industry. The company has traded at a high at $100 during the natural gas boom, but with the cheap shale gas boom the shares have come as far down as $15. The company took a huge hit to its balance sheet due to SEC reporting standards requiring the company to write down reserves and carry them at the market value of natural gas while natural gas was trading near all-time lows. Conversely, at the end of this year the company will increase the value of its reserves on the balance sheet by billions if the prices remain steady through the year-end.
The natural gas curve implies that gas should trade around $4 by December, which is a tremendous bullish indicator for this company. UPL is able to beat out its competitors and turn a profit when gas is as low as $3 (the company's all-in cost), and since a third of UPL's production is hedged over $3.70, it should be able to turn huge margins this quarter.
Ultra's net asset value is estimated to be $23 per share, meaning at the current price it is quite favorable. The company is also trading significantly below a reasonable applied EV/EBITDA multiple of 8.5x. With a rise in natural gas prices, the effect will be even larger on the shares since margins will be affected with a "delta." UPL, as the lowest cost producer may rise faster than its peers, since profit margins will rise much faster for the lower cost producers than for the average producers should the price of natural gas rise. With S&P predicting $5.00/MBtu gas in 2015, profit margins should rise to 66% assuming production costs stay flat (they have been declining steadily and management has predicted further savings.)
For more in-depth analysis, see the article here.
|Net Margins||See 10K|
|Implied Fair Value $30-$40|
The aforementioned companies are all largely unlevered to the exclusion of UPL and should remain solvent even during market turmoil. In conclusion, there is value to be found even at the current market levels amongst small-cap companies.
Disclosure: I am long UPL, BWC, MWA, CROX, DLB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.