It’s been said that the only two things that will survive a nuclear holocaust will be cockroaches and Peavey amplifiers. If you’re a musician, the Peavey joke was for you. Cockroaches are another discussion. They’re basically the same as they were when the dinosaurs ruled the earth. And they keep going.
The cockroach analogy is used in the investment arena when discussing the problems a company may be having. When you see one, there’s usually another and another. Prime example: Enron. Typically, being compared to a cockroach (or “cock-a-roach” as Tony Montana from Scarface would say) isn’t that flattering. We’re here to turn it around. Sometimes, standing the test of time can be a good thing, especially in business.
The independent sales rep (or woman) has been around since the dawn of commerce and companies who embrace that particular distribution method followed shortly thereafter. While many of those companies have come and gone, a few well known standouts have stood the test of time and may have a place in your portfolio.
Avon Products (AVP) is probably one of the most visible direct sales. Since 1886, they have energized millions and millions of women to fly the flag of Avon Lady entrepreneurship. The stock trades at around 29.38 which is an interesting 19% discount to the 52 week high. At about 20 times with a yield knocking on 3%, international sales have been a key driver to growing the business as the middle class emerges in developing economies.
While looking for investment ideas, it may pay to heed the bumper sticker and ask someone about Herbalife (HLF). Selling nutritional products, weight management supplements as well as skin care products, HLF has also embraced the direct sales strategy and capitalized on the global emerging middle class. HLF shares are around 65.43 at 15.38 times trailing earnings and pay a 1.53% dividend.
Last, tribute must be paid to the most venerable of all direct sales companies: Tupperware Brands (TUP). For over 60 years, Tupperware parties have helped to keep food fresher with the trademark Tupperware seal. In the last ten years the company has expanded globally adding beauty products to their portfolio. TUP is around 47, 13.21x’s trailing and pays a 2.55% dividend. Not bad for a great brand name with consistent performance.
Say what you want about cockroaches but they’ve survived nuclear size, prehistoric meteor strikes, an ice age or two probably and have defied evolution. The direct sales model has similarly endured wars, depressions, recessions, malaise, even the rise of the game changing internet. Like roaches, they’re not going away anytime soon.
Well from insects to livestock, let’s meet this week’s three lil’ piggies.
Play It Again…Sam
Kohlberg Capital Corporation (KCAP)
Recent Price: 6.83
Current Yield: 9.95%
We profiled KCAP a while back and although it has yet to make the Prize Pig list, we still remain committed. Recently, the BDC (business development company) settled a year long legal harangue with their lender, Bank of Montreal (BMO). That overhang is gone and analysts are confident the company can pay down all debt by the end of February, 2011. Shares trade at .74 times book value which is an interesting value. Furthermore, despite record liquidity, businesses are turning to alternative funding sources like BDCs after getting a year’s worth of the cold shoulder from the banks. That should bode well for companies like KCAP in the near term.
The most glaring roadside flare would be the fact that KCAP had some problems with their lenders. Not an encouraging sign as we ease into a rising rate environment. Not to mention the question of their ability to borrow when they need to. And as long as the economy stays weak to tepid, the investments in KCAP's portfolio (mezzanine loans, CLOs, etc.) will deteriorate if the business of the underlying borrower does so as well. A lot of alligators in this swamp. Not for the amateur.
Power to the Peoples…
Peoples-Sidney Financial Corp (OTC:PPSF)
Recent Price: 6.51
Current Yield: 6.75%
Headquartered in Sidney, OH, just north of Dayton, PPSF operates as a holding company for Peoples Federal Savings and Loan. Tracing their roots back to 1886, the company offers the usual plain vanilla products: deposit accounts, consumer, commercial, and real estate loans. Nothing fancy here. A tiny (32 employees and a CEO who was paid an obscene $206K last year) S and L with a handful of branches nearby. A tiny little company with $9.35 million on the balance sheet! Big deal? You bet! Since the market cap of PPSF is $8.86 million. That comes out to $6.87 per share in cash. The stock can be purchased for less than cash and trades at .54 times book. Going by the numbers alone, this one’s worth a look.
There’s a fine line between being old fashioned and being a Luddite. PPSF doesn’t have a website. We checked as best as we could. Maybe you’ll have more luck. That strikes us as quite odd in this day and age. Limited information can make an investor nervous especially with a stock that traded a whopping 296 shares on Tuesday. Despite rosy reports, the economy is still having a tough time. Ohio was particularly hard hit. FINREG is another headwind. It’s expected to be particularly harsh on smaller institutions. PPSF is beyond small. It’s practically microscopic.
Maybe you can take a chance on the Wabash Cannon Ball
FFW Corporation (OTCQB:FFWC)
Recent Price: 14.00
Current Yield: 6.28%
There’s no thematic intention for profiling two mini-banks in the Ohio/Indiana area in the same post. It just happened that way. FFWC is the parent corporation of Crossroads Bank which services its customer base via five branches. There is also an investment and insurance arm. A $300 million bank, FFWC would be considered “well capitalized” by regulators. The numbers tell a good story. Shareholders equity sat at around $29 million up from about $28 million the previous quarter. Remember, this is another tiny company with a total market cap of $15.73 million (but, unlike the previous name, they do have a website). That puts the stock price at about half of book value. I’ll quote Dumb and Dumber’s Lloyd Christmas: “I like it a lot.”
While FFWC’s numbers look OK, Q3 earnings were off 10% over Q2. That’s a significant whack. ROE was soft as well: 6.73% vs. 8.31%. Keep in mind, FFCW’s home office is smack dab in the middle of America’s industrial heartland which is valiantly struggling to get up off of the canvas. Obviously, that doesn’t help the banking business. Then there’s the liquidity issue. On 4 November, 100 shares traded. The next day, 1,550. Use a limit order if you must and prepare to hang on to something like that for a while.
Disclosure: Long KCAP