The peak of earnings season came to an end last week. Several companies with strong value characteristics reported; below, I've reviewed some quarterly results of interest to value-oriented investors.
Amtech Systems (ASYS): At first glance, ASYS looks like the cheapest stock imaginable. As of September 30, the company has over $70 million -- $7.17 per share -- in net cash (including restricted cash, subtracting long-term tax liabilities). In the fiscal year ending in September, the company earned $2.34 per share, giving it a P/E below 4 and an enterprise value-to-earnings ratio of 0.7. Free cash flow was $10 million, just below the company's enterprise value of $11 million. Add in the fact that earnings and revenue more than doubled year-over-year (giving the company a PEG of 0.02), and ASYS may, on a purely numerical basis, be the cheapest-looking stock in the entire US market.
So why has the company's stock price dropped from 30 to below 9 in the last 9 months? The company makes capital equipment for solar cell makers, and its customers have been struggled mightily as a supply glut has decimated prices. Indeed, guidance issued with ASYS' fiscal fourth quarter earnings shows the massive slowdown in the industry. For the December quarter, the company expects revenues of just $21-$23 million, off 60% year-over-year and nearly two-thirds sequentially, and forecast a loss for the period. Investors reacted poorly to the company's outlook, knocking the stock down nearly 17 percent.
The question with ASYS is whether it is a value trap, or a value play. Given the pressure on its customers -- 65% of whom are from China -- revenues may stay at depressed levels for the foreseeable future. Yet, ASYS is currently priced as it will go out of business. With the stock trading right near liquidation value, it seems the market may have overreacted to the sector-wide troubles facing Amtech. Investors can use cash-secured puts at the 7.5 strike to create a cost basis below the company's net cash, providing further downside cushion. In the short term, it seems unlikely that the news will get better for ASYS. But long-term investors may have an opportunity to snap up a traditionally profitable company for little more than the value of its assets.
Cato Corporation (CATO): Cato reported earnings of 21 cents per share Thursday morning, a positive surprise after the company had pre-announced expectations closer to 18 cents after weak same-store sales during the quarter. Investors cheered, driving up the stock 2.5% on a down market day, reversing some of the 6.4% loss the company suffered over the first three days of the week.
While third quarter results surprised, the company did steer fourth quarter guidance toward the low end of its previous range of 32 to 35 cents per share. I've been bullish on Cato in the past, including an aggressive recommendation in early October when the stock broke below $23/share and above a 4% yield. But the weakness in recent same store sales -- they were down 3% in the third quarter -- should worry investors. At Thursday's close of $25.77, CATO still looks cheap, with a P/E below 12 based on FY2012 (ending January) earnings guidance of at least $2.18 per share. The $7.66 per share in net cash, and 3.57% yield add further fuel to the bull case.
But the company's extensive presence in the Southeast -- one of the most depressed regions in the country -- may be taking its toll. Same-store sales are, as noted, depressed, and margins fell slightly in the third quarter. Store openings are now projected to be below guidance (a net gain of 38, versus a prior projection of 41), and will represent just a 3% growth in locations for the year. Cato still looks cheap, but slowing revenue may result in lower earnings, and possibly a return to the lows around $22 the company reached just a few weeks ago.
Dell has focused on improving margins, and did so, with gross margin up 310 basis points year-over-year. The company's net tax rate fell as well, as the company's profit mix shifted toward countries with lower corporate taxes.
For the most part, Dell's recent earnings did little to change the story of the stock. I covered the bull case for Dell two months ago: The company generates prodigious amounts of cash ($4.9 billion over the last twelve months, 25% of enterprise value); has an outstanding balance sheet ($8 billion in cash net of debt); and continues to transition from a consumer-focused technology retailer to a corporate-focused provider of higher-margin services. In the short term, supply chain disruption related to the recent flooding in Thailand -- particularly in hard drives and disk storage -- may have some top-line impact for the company. But the long-term thesis still holds:
Dell has successfully, if not spectacularly, moved its focus to the services and storage segments. While overall revenues are flat, there is growth in higher-margin corporate sales, driving earnings improvement and substantial cash generation. US consumer weakness is simply no longer a major problem for the company, which makes just a single-digit percentage of net income from the American shopper. The focus on corporate customers and growth in emerging markets means that Dell's margin improvements should continue, and an already undervalued stock price may have significant room for growth.
Kirkland's (KIRK): The home decor retailer reported third quarter earnings of six cents per share, ahead of Wall Street estimates and the company's own expectations for three to five cents, issued earlier this month. Investors were not impressed, however, knocking the stock down 5.5%, perhaps on the company's outlook for the fourth quarter. The company expects comps to be down 2-5% for the quarter, after a 6.7% percent decline over the first nine months of fiscal 2011.
Friday's drop interrupted a long bull run for the stock, which had risen over 50% after hitting a 52-week low around $8 after reporting second quarter earnings in August. That rise seems to have outpaced the company's performance. Net sales are rising modestly, with growth in locations and square footage slightly exceeding the same-store sales drops. Meanwhile, earnings for 2011 - guided at a range of 84 to 89 cents -- will be well behind the $1.71 and $1.29 earned in 2009 and 2010, respectively. Yes, the company offers $3 per share in net cash and has $31 million (or 12% of current market capitalization) remaining on a stock repurchase program. But with comps negative, net sales relatively flat, and earnings declining, a P/E in the range of 14 to 15 seems too optimistic.
Stein Mart (SMRT): The retailer reported a third quarter loss on Thursday morning, as same-store sales fell nearly 3% and margins declined. Investors shrugged, as the stock fell modestly during Thursday's session, though recent declines have SMRT bouncing off a multiple bottom around $6/share:
Chart courtesy finviz.com.
The company was upbeat about October comps being slightly positive, a reversal of a dreadful summer the company blamed in part on Hurricane Irene. In addition, the strong support at 6, the P/E just above 10 (based on the company's trailing adjusted earnings of 63 cents) and $2.37 per share in net cash would seem to bode well for the stock.
Still, third quarter earnings show the lack of a catalyst for SMRT. Sales were down for the quarter and the first nine months, both on a comparable and net basis. This continues the trend of decreasing revenues at the company, which has seen net sales drop every year since 2008. Yes, the stock seems cheap -- but the company's uninspired performance doesn't seem to merit much more in terms of valuation.
The Gap (GPS): Investors were quite disappointed with The Gap's earnings, driving the stock down 7.6% on the week. Yes, the company re-affirmed full year guidance of $1.40-$1.50 per share; yet share count has been cut by sixteen percent year-to-date, as the company has spent $2 billion on share buybacks. As such, the unchanged earnings guidance should be seen as evidence of the company's struggles. Worse, that $2 billion seems almost wasted, as the stock is off 11% year-to-date and the company's reduced net income has matched the reduced share count, keeping EPS flat (and actually down substantially from the company's guidance at the beginning of the year).
In the company's conference call, the company talked up its growth in China as a driver for future growth. Yet international comps were down 10% year-over-year, the worst of a company-wide series of negative comps. Gap was down 6%, Banana Republic down 1%, and Old Navy down 4%.
The Gap has been stuck in a range between $16 and $22 for most of the last decade; as I noted in September, the company has embarked on a seemingly endless series of "turnarounds" in an attempt to break out of its trading range. The struggles this year, the emphasis on investment in China, and the need for a new merchandise portfolio would seem to mean the company is trying to reinvent itself yet again.
The difference now is that at Friday's close of $18.75, the stock would still seem to have farther to fall, toward historical support in the $15-16 range. The massive buyback this year has papered over some of the company's issues. But it seems likely that the market will eventually catch on. Investors should expect a slowdown in the stock as investments in China and new merchandise keep earnings and cash flow growth sluggish for the next few quarters.