At the end of the week I like to update my watchlist and review earnings reports for any news that might remove companies from the list, or move to them to the top of the list for purchase. A review of five potential value stocks that reported earnings this week:
Hi Tech Pharmacal (HITK): The generic drug maker crushed analyst estimates for the second consecutive quarter, posting a profit of $1.05 per share, 25% above the analyst consensus of 84 cents. (Fiscal 4Q earnings, reported in July, were $1.08 vs 71 cents; soon after, the company raced to a 52-week high before pulling back.)
Hi Tech offers $4.87 per share in net cash, and trailing-twelve-month earnings of about $3.75 per share, giving it an enterprise value/earnings ratio below 7. Free cash flow for fiscal year 2011 was $23 million, about 7% of enterprise value, despite a $17 million rise in working capital.
Hi Tech has some short-term issues to work out: Most notably, the FDA has ordered the company to cease production of several drugs, including Lodrane, an allergy and cold medicine, which accounted for roughly 6% of sales in FY2011. All told, the products under review accounted for 9% of sales and are on hold until the company provides efficacy and safety data (according to the company's 10-K). In response, analysts see lower earnings, with estimates for the next two years hovering around $2.75 per share annually.
Over the long term, however, the pending "patent cliff" for many major prescription drugs and the aging of America's population should bode well for Hi Tech. Even at the lower estimated earnings, the company still offers value and a host of opportunities in a growing industry.
US Global Investors (GROW): The mutual fund management company, which focuses primarily on gold and natural resources in emerging markets, reported fiscal year 2011 earnings on Tuesday. Revenue jumped nearly 19%, and profits jumped over 45% year-over-year.
I recommended GROW as a value dividend stock back in July, only to see the stock fall some 15% to its close Thursday at $6.89. The company pays a 2-cent monthly dividend, offering a current yield of 3.48%. With $2.44/share in cash and no debt, US Global Investors trades at an enterprise value-to-earnings ratio of about 8.7. Trailing free cash flow is about $7 million, over 10% of enterprise value, and nearly double the dividends paid. While a bear market may hurt the stock, the company still generated free cash flow through 2008 and 2009, and its focus on natural resources and gold should provide a buffer in a downturn.
Hooker Furniture (HOFT): The maker of home furniture reported solid second quarter earnings, with sales up 4% year-over-year. HOFT offers nearly $3 per share in net cash and a dividend yield of 4.26%. While there are some payout ratio concerns based on earnings (only 29 cents over the trailing twelve months, versus 40 cents in dividends annually), the cash cushion should support the dividend going forward until the broader economy rebounds.
Hooker is trading well below its tangible book value of about $11.40 per share, and bouncing off a multiple bottom in August at about $8.00. It is more speculative than any others on this list, but investors with the patience for the company to continue its turnaround, or willing to bet on a broader rebound can be rewarded with the stock.
Korn/Ferry International (KFY): Korn/Ferry's fiscal first quarter earnings were met with a yawn by investors, as the stock fell 1.7% on a down day for the broader market. Earnings of 33 cents per share were in line with estimates, as was the company's guidance of 30 to 36 cents per share for the October quarter.
The executive recruiting firm offers over $4 per share in cash net of deferred compensation obligations, some 28% of market cap. Trailing earnings of $1.34 give the company a EV-E ratio right at 8, and free cash flow in FY 2011 (ending in April) was $68 million, over 13% of its market capitalization.
Conns (CONN): The electronics retailer was one of the week's biggest movers, outperforming the entire Russell 2000 on Wednesday with a nearly 40% rise. The company reported strong results for the second quarter, and guided fiscal year adjusted earnings to a range of 65 to 75 cents, well past analysts' estimates of 55 cents for the year. In addition, the company refinanced a term loan, a move that the company estimated would add 27 cents per share to the annual bottom line going forward.
Conns may seem an odd choice for value investors; its debt load of over $11/share certainly . Yet the company has generated nearly $120 million in free cash flow (less debt expense) in the 9 quarters prior to this one (cash flow numbers have not yet been released), nearly half of its market capitalization. Its tangible book value is at $11.41 per share, well above Thursday's $7.70 close.
Conns' distinctive feature is its choice to do nearly all financing in-house. While this has no doubt frightened investors worried about creditworthiness in a depressed macro environment, it's important to note that 62 of Conns' 71 outlets are in Texas, where the economy is stronger and household debt is far lower. (The other 9 are in Louisiana, with six, and three in my home state of Oklahoma, one of the strongest economies in America.) Even when discounting the value of inventories and consumer receivables, CONN looks to be trading just slightly higher than its liquidation value. Considering the company's history of generating cash flow, and its forward P/E of 11 at the midpoint of guidance, CONN looks like a bargain.