- PPG's EBITDA margin is the best among peers, and its dividend track record is among the best we've seen.
- Synaptics most recently registered a 9 on the Valuentum Buying Index in August 2012, at $28 per share.
- USG may have the highest incremental margin on new revenue of any firm in our coverage universe.
Valuentum has an extensive coverage universe, and only about 35-40 companies constitute what we define as a "Best Idea". Still, there are a large number of firms that we're watching closely for addition to either portfolio. Let's evaluate three of them in this article.
A "Best Idea" in Valuentum parlance is a holding in the Best Ideas portfolio and/or the Dividend Growth portfolio. For those that may not be familiar with the methodology, we typically add shares to the Best Ideas portfolio when they register a high rating (a 9 or 10 = a "we'd consider buying" rating) on the Valuentum Buying Index, and hold them until they register a low rating (a 1 or 2 = a "we'd consider selling" rating) on the Valuentum Buying Index. We don't add all firms that register a high score on the Valuentum Buying Index to the actively-managed portfolios, due to sector weighting or overall market valuation considerations, among others.
We are also one of the largest providers of dividend research. The Valuentum Dividend Cushion ratio, a forward-looking cash-flow-based measure of dividend health, is a key factor behind adding companies to the Dividend Growth portfolio. The measure is used in conjunction with a company's annual dividend yield, its price-to-fair value ratio, and Valuentum Buying Index rating, among other considerations, to uncover stocks that have the best dividend growth prospects over the next couple decades and beyond.
With all of that said, let's dig into the three ideas for your radar.
PPG Industries (NYSE:PPG) -- Valuentum Buying Index: 6 -- Fair Value Estimate: $195
PPG is a major global supplier of coatings for customers in a wide array of end-markets. PPG's aerospace coatings business supplies sealants and coatings to many commercial and military aircraft, its architectural coatings are used by painting and maintenance contractors for decoration and maintenance of residential and commercial buildings, and its industrial coatings are used by automotive OEMs. The firm isn't too capital-intensive, has pricing power, and its top-market share position in a consolidating industry is hard not to like. The company's EBITDA margin is the best among peers, and its dividend track record is among the best we've seen (it's an Aristocrat).
During the company's first quarter, PPG reported its highest sales volume growth (5%) in three years, as total revenue cruised 17% higher. Management noted that adjusted earnings per share leapt 40% versus the prior year, with improvement across every region. PPG is one of our favorite ideas in the chemicals industry, but the reason why it doesn't qualify as a "Best Idea" is that its valuation leaves much to be desired (even as it upped its dividend to $0.67 per quarter). We're still waiting for a better price at a larger discount to intrinsic value. Shares are trading over $200 each at the time of this writing.
Synaptics (NASDAQ:SYNA) -- Valuentum Buying Index: 6 -- Fair Value Estimate: $68
Synaptics most recently registered a 9 on the Valuentum Buying Index in August 2012, at $28 per share. Clearly, we're not very happy that we didn't add the company to the Best Ideas portfolio at the time, but at the same time, we like the continued affirmation of the Valuentum process in stock selection.
Synaptics provides custom human interface solutions (cursor control), and generates half of its revenue from mobile smartphones. The tablet market and its fingerprint ID business represent new opportunities for its intellectual portfolio, and while the company's valuation opportunity has closed, we were impressed with its fiscal third-quarter results. The company expects fiscal 2014 top line growth of 37%-40%, up from expectations of about 20% at the beginning of the year, thanks to a stronger outlook for its fingerprint ID operations.
We're not putting new money to work in the company, but Synaptics has been one of the best innovators over the past 5-10 years, and we encourage investors to keep a close eye on its intellectual portfolio. Shares are trading at roughly $66 each at the time of this writing.
USG Corp. (NYSE:USG) -- Valuentum Buying Index: 6 -- Fair Value Estimate: $51
USG may have the highest incremental margin on new revenue of any firm in our coverage universe. Incremental operating profit margins following cyclical economic troughs at the company have been 35% during 1982-1985, 56% during 1992-1995, 33% during 2001-2004, and roughly 60% since 2012. Said differently, for every new dollar of revenue, 60% of it falls to the operating profit line, working wonders on profitability - this relationship is often called operating leverage.
USG makes wall, ceiling, flooring, and roofing products for the residential/non-residential construction markets and repair/remodel construction markets. The firm boasts the well-recognized SHEETROCK wallboard brand name. In its first-quarter results, sales advanced 4%, while operating profit surged 35% -- not quite as strong operating leverage as in recent quarters, but still impressive. Operating leverage is the area that most analysts get wrong, and our forecasts for future profits at USG indicate upside potential. Shares are trading at roughly $30 each at the time of this writing. The company's large debt load, however, may keep us on the sidelines indefinitely. Still, we think it's one for the radar.
Wrapping It Up
As we mentioned previously, our best ideas are always included in the Best Ideas portfolio and/or Dividend Growth portfolio, but we hope you have enjoyed these three quick takes of three fascinating firms for your radar. Thanks for reading!