Seeking Alpha
Profile| Send Message|
( followers)

I focus on value small-cap and mid-cap stocks. The screens I use sort for stocks with manageable debt to equity ratios, good price to free cash flow ratios, cash on hand, and a solid return on equity. Cirrus Logic Inc. (NASDAQ:CRUS) and Nam Tai Electronics, Inc. (NTE) are two of many that fit the screen profile. I build my portfolio with companies, like CRUS and NTE that offer an excellent mix of deep value and fundamental strength.

Cirrus develops precision analog and mixed-signal integrated circuits for a range of consumer and industrial markets. The market has been very worried that its biggest customer, Apple (NASDAQ:AAPL), might steer some of its business elsewhere. I see very little evidence for this, and it seems like an overreaction based on the loss of a contract and unsubstantiated analyst opinion. It looks like Cirrus is actually appropriately diversifying and expanding its customer base while nurturing its relationship with Apple. Nam Tai Electronics, Inc. is an electronics manufacturing and design services provider to a select group of the OEMs of telecommunications and consumer electronic products. Growth at Nam Tai has slowed recently, and that has put the market in panic mode. There are numerous signs of strength at Nam Tai, and even at a lower growth rate, current prices offer excellent valuation. I ran a discounted free cash flow valuation analysis at a 12% discount rate for both companies.

Cirrus has an excellent balance sheet, with a $1.21 billion market cap, $268 million in cash on hand, free cash flow of $301 million, and no debt. Free cash flow growth has been excellent, with median growth over the past five years of 39.8%. I expect growth to stay on course, the market is fearful that Cirrus will lose some of its contracts with Apple. Even if we lower future growth considerably, Cirrus is a good value at today's prices. If we give Omega a 20% future growth rate, that would give us a fair value of about $51.78 and a 62% margin of safety. At a more optimistic growth rate of 30%, I place fair value at $102.44 with an 81% margin of safety. If growth drops to 10%, that would give us a fair value of about $32.78 and a 41% margin of safety. I prefer the conservative 20% growth projection, and at least a 50% margin of safety; that would put a buy price at $28.66 or under.

Nam Tai has an excellent balance sheet, with a $359 million market cap, $239 million in cash on hand, free cash flow of $96 million, and no debt. Free cash flow growth has been excellent, with a five-year median rate of 38.9%. I expect similar growth going forward, but growth has slowed recently: I'll run my value analysis with more conservative numbers. If we give Nam Tai a modest growth rate of 20%, we get a fair value of $44.92, and an excellent margin of safety at 82%. If growth drops further to 10%, we would still have a good fair value of $26.60 and a solid margin of safety at 70%. If we play it very safe and forecast growth at 0% and use at least a 50% margin of safety, our buy price would be at $8.44 or under, with a 53% margin of safety at today's prices. I prefer the conservative 10% growth projection and at least a 50% margin of safety; that would put a buy price at $13.30 or under.

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.