Seeking Alpha
Long only, value, growth, dividend investing
Profile| Send Message|
( followers)

Overview

Last week, I wrote Round 2 of this article in which I listed and reviewed three low priced stocks that I believed should be avoided. The stocks I reviewed in Round 2 were Acorn Energy (NASDAQ:ACFN), Adecoagro S.A. (NYSE:AGRO), and Roundy's (NYSE:RNDY). Round 1 stock selections and reviews can be found here.

For Round 3, I will once again focus on stocks that are currently priced at under $10. In determining why I find that these stocks should be avoided, I will be looking at each company's financial performance, current valuation, recent trading activity, earnings and future outlook.

Stock No. 1

A. H. Belo Corporation (NYSE:AHC) is a newspaper publishing and local news company that owns and operates four daily newspapers and a diverse group of several websites. The company also operates a variety of niche publications and direct mail businesses. Founded in 1842, AHC's headquarters is in Dallas, TX.

Financial Performance

Profit Margin (Trailing Twelve Months)-0.62%
Return on Assets (Trailing Twelve Months)-0.09%
Return on Equity (Trailing Twelve Months)-2.79%
Revenue (Trailing Twelve Months)429.85M
Revenue per share (Trailing Twelve Months)19.48
Quarterly Revenue Growth (Year Over Year)-4.20%

AHC is stuck in a dying industry and it hasn't been able to fix any of the problems that plague the companies within the industry. AHC has seen revenue shrink consistently year over year. Revenue in 2009 was $518 million, $487 million in 2010, $462 in 2011, and $440 in 2012. AHC is on pace to see a significant decline in revenue this year as well.

Current Valuation and Recent Trading Activity

AHC has a current price-to-sales value of 0.3x and a price-to-book value of 1.5x with a negative earnings per share of $0.12.

AHC closed Friday at $7.08, $0.97 shy of its 52-week high and $2.78 higher than its 52-week low. It is trading higher than its 200-day moving average of $6.19 but below its 50-day moving average of $7.32.

Earnings

AHC reported earnings per share of $0.05 in its last quarterly report, an increase from the same period last year in which earnings per share were $0.01 per share. In six of its last 10 quarterly reports, AHC has reported negative earnings.

Company Outlook

AHC's revenue and profit has been on a steady decline recently. The company has done an admirable job of cutting expenses to help maintain a positive net income, but there is only so much a company can cut. AHC cut its workforce by 6% this year and I see continued cuts in the future as the company tries to work with continued declines in revenue. Because of this, I recommend avoiding this stock.

Stock No. 2

Frontier Communications Corporation (NASDAQ:FTR) is a telecommunications company that provides television, telephone, and Internet services. The company was founded in 1927 and its headquarters is in Connecticut.

Financial Performance

Profit Margin (Trailing Twelve Months)2.08%
Return on Assets (Trailing Twelve Months)3.93%
Return on Equity (Trailing Twelve Months)2.74%
Revenue (Trailing Twelve Months)$4.88B
Revenue per share (Trailing Twelve Months)$4.92
Quarterly Revenue Growth (Year Over Year)-5.40%

FTR has seen a strong decline in revenue since early 2011. The company is on pace for similar declines this year and next.

Current Valuation and Recent Trading Activity

FTR has a current price-to-earnings value of 19.1x and a price-to-book value of 1.2x with earnings per share of $0.24.

FTR closed Friday at $4.55, $0.60 shy of its 52-week high and $0.84 higher than its 52-week low. It is trading above both its 200-day moving average of $4.18 and just above its 50-day moving average of $4.19.

Earnings

Last quarter, FTR reported earnings of $0.06 per share, which was in line with analyst estimates. It was actually the first time in the past three quarters in which FTR met earnings' estimates. Earnings have been bad for FTR with a negative 1-year growth rate of 23.38% and a negative 5-year growth rate of 17.70%

Company Outlook

In Round 3 of my article 'Low Priced Stocks Worth Buying', I reviewed another telecommunications company. The company was 8X8, Inc. (NASDAQ:EGHT). And while that company has seen steady increases in revenue and earnings, FTR has seen the exact opposite. FTR currently pays a nice dividend (yielding over 8%), but with continuing declines in revenue and a payout ratio over 50%, in my opinion it is only a matter of time before this dividend is cut. FTR has been able to slow the bleeding related to lower revenue, but it hasn't been able to reverse the trend. It doesn't appear that the company is going to accomplish this any time soon. Because of this, I recommend avoiding this stock even with its attractive dividend yield.

Stock No. 3

Windstream Corporation (NASDAQ:WIN) is another telecommunications company that operates as a communications and technology provider primarily to rural residential customers. The company is based in Little Rock, Arkansas.

Financial Performance

Profit Margin (Trailing Twelve Months)2.44%
Return on Assets (Trailing Twelve Months)4.22%
Return on Equity (Trailing Twelve Months)13.02%
Revenue (Trailing Twelve Months)$6.09B
Revenue per share (Trailing Twelve Months)$10.39
Quarterly Revenue Growth (Year Over Year)-2.10%

Revenue was down this quarter, but overall, revenue growth hasn't been a problem for WIN in recent years. The company has seen its revenue grow from $2,997 million in 2009, to $3,712 million in 2010, to $4,286 million in 2011, to $6,156 million last year.

Current Valuation and Recent Trading Activity

WIN has a current price-to-earnings value of 20.6x and a price-to-book value of 4.7x with earnings per share of $0.40.

WIN closed Friday at $8.20, $2.84 shy of its 52-week high and $0.70 higher than its 52-week low. It is trading below its 200-day moving average of $8.53 but above its 50-day moving average of $8.812.

Earnings

WIN reported earnings per share of $0.07 for Q2. This was a miss compared with the estimated amount of $0.09 per share that was expected. WIN has missed estimates in seven of its last 10 quarterly reports. Windstream has a negative 1-year earnings growth rate of 18.18% and a negative 5-year earnings growth rate of 15.10%.

Company Outlook

Windstream has seen revenues grow the past few years, however, the company has been unable to translate this into earnings growth. Earnings per share of WIN continues to decrease. WIN has paid a consistent quarterly dividend of $0.25 per share since late 2006. But with earnings continuing to decline and a payout ratio of over 400%, it's only a matter of time before this dividend will have to be either cut or suspended all together. Because of WIN's inability to show any signs of earnings growth, I recommend avoiding this stock.

Conclusion

Each of the companies (AHC, FTR and WIN) reviewed above all have negative earnings growth over the past few years. None of the companies has shown an ability to reverse this trend. Because of this the stock price as well as related dividends are in jeopardy. Of the three companies, I think WIN has the best chance of turning things around as the company has seen increased revenues. However, at the current time (and at each stock's current price), I feel that each of these stocks should be avoided.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Source: Low-Priced Stocks To Avoid: Round 3