It is the goal of every equity investor to find the elusive 5,10, 20, 50, or 100 bagger (using Peter Lynch’s famous phrase). Long-term results in equity investing are a byproduct of the correct analysis of a business, buying good or great enterprises at excellent or fair prices, patience, and a strong stomach. The current environment for equity investors is difficult because the European debt crisis has equity markets held hostage.
As a result, equity investors have to be able to keep buying the stocks of companies that they believe represent excellent value, and keep holding until either Mr. Market agrees to recognize the value, the European debt crisis is resolved, or both. Here are 3 common stocks of companies priced under $2 per share, which I believe represent good value.
(Full disclosure: Yale Bock, the family of Yale Bock, Y H & C Investments, and clients of Y H & C Investments own positions in the following securities.)
Jamba Juice (JMBA) - $1.30
Jamba Juice is a leading health and wellness company specializing in products like beverages, smoothies, food, and consumer packaged goods, which support a healthy and active lifestyle.
Current State of the Business
Over the last three years, JMBA has been changing the business model from one based on company owned stores (60%) to one with more balance and less risky opportunities to grow in franchising, and the licensing of consumer packaged goods. Company owned stores now represent approximately 40% of total revenue ($250 million per year run rate). The company executed well in 2011 with both company owned and franchise stores showing positive same-stores sales in each of the last four quarters. The last quarter saw company owned same-store sales up 3.3% and franchised stores same-store sales up 4.2%. New products, higher attachment rates, improved market through social networking and Jamba juice cards, and a more efficient supply chain are all contributing to the improving operations. However, investors see a contraction in top line revenue and have abandoned the stock, which is down almost 50% in 2011.
The primary reason JMBA is attractive is in every section of the business there are solid growth prospects. The overall health and wellness market is approximately $50 billion dollars. As an indication of the opportunity in the space, Starbucks (SBUX) recently bought Evolution Fresh to create a larger presence in the market. In the company owned store segment, JMBA only has stores in 26 states and they are focused on expanding the domestic-store base in the Northeast and Southeast, where they are underpenetrated.
On the franchise front, new licensees in Canada, the Philippines, and South Korea, are all strong operators that can grow the store base in each country. Management expects to open 80 units in 2012, 40-50 in the United States and 10-15 internationally. In addition, JMBA is testing a new JMBAGo Platform in 30 university and K-12 schools to see if the concept deserves to be expanded, another possibly enormous opportunity. Jamba Juice has a total of 762 stores, so opening 80 unites translates into unit growth of a little over 10% for the year.
Licensing of CPG goods has been a priority and the company currently has CPG products in over 28,000 points and is looking to grow that number dramatically. Licensing revenue is expected to grow from $750K in 2011 to over $3 million in 2012.
The stock of JMBA currently is priced at $1.30 per share. Based on 85 million diluted shares outstanding, the existing market value is $110 million. If one backs out the net cash position of $25 million, the enterprise value is $85 million.
In recent years, operating cash flow has been all over the place, ranging from a negative one million last year to $8.5 million the previous year. The most recent 40-week period shows operating cash flow of $2.5 million with capital expenditures of $8.5 million. The key takeaway is 2012 should be a year where operating cash flow and free cash flow will improve dramatically. Much depends on management’s ability to deliver on existing execution strategies; company owned store adjusted operating margins of 19-22%, and the continued expansion of the CPG licensing program.
SmartPros (SPRO) - $1.80
SmartPros provides learning and training solutions in a variety of industries, including accounting, finance, technology, engineering, and education.
Current State of the Business
SPRO has seen flat revenue over the last three years, with a range from $17-$19.5 million dollars in revenue for an entire year. The lack of revenue growth is a major negative when equity investors are always focused on top line expansion at the highest possible rates. The primary segment of SPRO’s business is the accounting segment, which provides 70%-75% of total revenue. A segment that has underperformed over the last few years is the custom technology business as most businesses are focused on reducing costs in every way.
Two promising initiatives are engineering training certification courses and an e-campus offering for the education sector. The company has also repeatedly stated it is actively looking for acquisition candidates and wants to use the cash on the balance sheet for accretive addition to the business.
SPRO has 4.89 million shares outstanding and the stock is currently at $1.80 per share, making the total market capitalization $8.80 million dollars. The company has nearly $6.5 million dollars of net cash on the balance sheet, rendering the current enterprise value at $2.3 million. Over the last three years, operating cash flow has averaged about $2 million dollars per year, with capital expenditures at $300K per year. The EV/OCF ratio is 2.3/2=1.15 and the EV/FCF ratio is 2.3/1.7=1.35 (assuming free cash flow is defined as operating cash flow - capital expenditures). The company has paid a small dividend for the last 8 quarters and has approved a $750K buyback. If one considers other education based companies, and the only criteria is EV/OCF or EV/FCF, I would be very surprised to find anything cheaper than SPRO
Disclosure: Yale Bock, the family of Yale Bock, Y H & C Investments, and clients of Y H & C Investments own positions in all of the above securities.
Disclaimer: Each investor needs to do his or her own research and due diligence on the specific companies mentioned and whether they fit into the investor’s specific risk tolerance, return objective, time horizon, liquidity needs, tax situation, or any other circumstance specific to the investor’s overall financial condition.)