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Paulo Santos, Think Finance (374 clicks)
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This article was born from a search for low-debt stocks trading at reasonable forward Price/Earnings (<15) and Price/Free Cash Flow (<15), while having present revenue growth (quarter-on-quarter) over 10% and strong predicted earnings growth, measured by earnings estimates for next year showing earnings growth above 30%.

As with any list of stocks derived from a screening process, further analysis of the candidates is warranted. I already carried out some of this due diligence, and present the results below.

Western Digital Corp. (WDC)

Western Digital Corp. is a maker of hard disk drives, with a market capitalization of $7.2 billion, and is trading at a TTM P/E of 9.49 with expected earnings growth of 68.94% taking it to a forward P/E of 5.69 next year. The TTM P/E means WDC trades at a discount to the S&P500 TTM P/E of 13.0. The PEG (Price/Earnings Growth) stands at 0.94, a level which is usually seen as attractive. WDC has a low Price/Book of 1.27. There are studies that indicate that low Price/Book stocks outperform over time, although some times the low Price/Book is also an indication of risk or permanently bad profitability.

The ROE is quite high at 14.46%, which is usually a sign of a good business (though sometimes cyclicality can be the reason).

The stock is up -4.42% in the last month. Still, year-to-date the stock is down by -8.70%.

Western Digital is having an year-end that’s being quite perturbed by the Thailand floods, which led to a shortage in HDD components and resulting price increase (and lower unit shipments). Such shortage will still be impacting pricing and availability during early 2012, and even led to a profit warning over at Intel (INTC). However, ultimately this will be a temporary factor.

On the other hand, WDC is negatively impacted by three different trends, the trend towards smart phones/tablets, the trend towards ultrabooks, and the (speculative) shift, over the long term, towards SSDs. This, along with WDC’s cyclicality, is what probably drove its valuation so low, even though there’s still an expectation of strong earnings growth.

Amtech Systems Inc. (ASYS)

Amtech Systems Inc. makes equipment for the production of solar cells and semiconductors, has a market capitalization of $76.19 million, and is trading at a TTM P/E of 3.45 with expected earnings growth of 1966.70% taking it to a forward P/E of 7.21 next year. ASYS also trades at a discount to S&P500 TTM P/E. ASYS has a low Price/Book of 0.66.

The ROE is quite high at 22.82%, which can be a sign of a good business.

The stock has been punished lately, being down -7.02% in just the last week and is also down -67.87% year-to-date.

Amtech was hit hard this year by the solar industry slump, yet expectations for 2012, albeit cut in half, still show the company as potentially undervalued. However, if revisions continue to take place this might no longer be the case. The deepness of the slump can be seen in the estimated near-60% plunges in revenues expected for the present and next quarters.

If we believe any kind of recovery in activity is possible (as per the analyst estimates), ASYS will seem a steal since the stock is trading at almost the cash it has in hand.

Culp Inc. (CFI)

Culp Inc. makes and markets mattress fabrics and upholstery fabrics for the furniture and bedding industries, trades at a market capitalization of $99.99 million, and is trading at a TTM P/E of 6.21 with expected earnings growth of 31.71% taking it to a forward P/E of 7.25 next year. CFI also trades at a discount to S&P500 TTM P/E. The PEG stands at 0.27, a level which is usually seen as attractive. CFI has a low Price/Book of 1.19.

The ROE is quite high at 21.19%, which can be a sign of a good business.

CFI is down by -24.42% year-to-date.

CFI has been missing earnings expectations with some consistency, and doesn’t surprise to be trading at what is a cheap valuation by most metrics. Very little growth is expected in terms of revenues, but earnings are expected to grow strongly into 2012. What seems to be missing here is some kind of catalyst to take the stock higher, as the multiples are not demanding and there doesn’t seem to be any kind of horrid issues with the company.

With such a low Price/Book, running a 21% ROE on little debt could make this company an acquisition target.

Coeur d'Alene Mines Corporation (CDE)

Coeur d'Alene Mines Corporation runs silver mines (and also explores gold, lead and zinc ore), has a market capitalization of $2.3 billion, and is trading at a TTM P/E of 31.60 with expected earnings growth of 99.42% taking it to a forward P/E of 7.41 next year. CDE also trades at a premium to S&P500 TTM P/E. The PEG stands at 1.26. CDE has a low Price/Book of 1.07.

The ROE is 3.46%.

The stock has been punished lately, being down -13.57% in just the last week and is also down -7.47% year-to-date.

The recent plunge can be attributed to the also recent fall in silver prices, the estimates might have not reflected this fall in its entirety even though there have been several downward revisions in estimates. The stock would need silver price appreciation as a catalyst for an up move, otherwise there remains risk to the downside.

LRAD Corporation (LRAD)

LRAD Corporation creates and sells advanced sound technologies for environmental and military applications, has a market capitalization of $53.73 million, and is trading at a forward P/E of 11.07. The Price/Book is 2.68.

The ROE is quite high at 32.53%, which can be a sign of a good business.

The stock is down -4.05% in the last month as well as being down -38.29% year-to-date.

LRAD is a microcap selling a unique technology, whose market size is hard to quantify, even if at the same time, and as revenues hold and grow, the company should have a moat in its uniqueness. The ROE seems sustainable, and the company is thus cheap, which could be due to its dependence on large orders which might, if missing in any given period, hit earnings negatively.

The company at its present valuation seems a prime acquisition candidate for some bigger military supplier or conglomerate.

Spirit Airlines, Inc. (SAVE)

Spirit Airlines, Inc. provides passenger airline service primarily to leisure travelers to and from south Florida, the Caribbean, and Latin America. SAVE has a market capitalization of $1.1 billion, and is trading at a TTM P/E of 14.88 with expected earnings growth of 49.20% taking it to a forward P/E of 11.79 next year. SAVE trades at a premium to S&P500 TTM P/E. The Price/Book is 2.51.

The ROE is quite high at 37.80%, which can be a sign of a good business.

The stock is down -3.04% in the last month. In spite of this, year-to-date the stock is still up by 32.73%.

The ROE on SAVE is surprising given the industry the company operates on. For the most part SAVE seems cheap and well run, however, historically it’s hard to fall in love for an airline, as this sector has had perhaps the worst fundamentals over time of almost any sector. To top it off, SAVE has been seeing upward revisions in its estimates both for 2011 and 2012.

Sypris Solutions Inc. (SYPR)

Sypris Solutions Inc. outsources and sells technical services, namely security solutions and machining/forging components for the transportation market. SYOR has a market capitalization of $78.80 million, and is trading at a TTM P/E of 14.07 with expected earnings growth of 966.67% taking it to a forward P/E of 12.31 next year. SYPR also trades at a premium to S&P500 TTM P/E. The PEG stands at 1.41. SYPR has a low Price/Book of 1.23. The ROE is 8.68%.

SYPR is down by -7.29% year-to-date.

SYPR seems cheap including on EV/EBITDA, but appears much less unique and attractive than LRAD. Its ROE is also much lower.

Dice Holdings, Inc. (DHX)

Dice Holdings, Inc. offers online recruiting and career development services. DHX has a market capitalization of $566.90 million, and is trading at a TTM P/E of 20.31 with expected earnings growth of 31.25% taking it to a forward P/E of 13.54 next year. DHX trades at a premium to S&P500 TTM P/E. The PEG stands at 0.83, a level which is usually seen as attractive. The Price/Book is 2.71.

The ROE is quite high at 15.72%, which can be a sign of a good business.

Year-to-date DHX is down by -40.56%.

DHX doesn’t seem to offer anything unique, although it trades at undemanding multiples. It’s more the kind of stock that would rise with the entire market, but struggles to find a catalyst to break from the pack. Recent lower jobless claims might, over time, make the case for steadier growth in the sector. Estimates have been seeing a bit of downward pressure – while the stock itself has been punished a lot harder.

TrueBlue, Inc. (TBI)

TrueBlue, Inc. provides temporary blue-collar staffing services, has a market capitalization of $527.18 million, and is trading at a TTM P/E of 20.55 with expected earnings growth of 34.29% taking it to a forward P/E of 13.99 next year. TBI trades at a premium to S&P500 TTM P/E. The PEG stands at 1.08. The Price/Book is 1.83.

The ROE is 9.11%.

TBI is down by -26.90% year-to-date.

TBI might also gain from a more robust employment market, signs of which have lately been seen in the jobless claims numbers. The stock is rather cheap, if unimpressive in terms of differentiation and profitability.

Monster Worldwide, Inc. (MWW)

Monster Worldwide, Inc. provides online job placement websites, has a market capitalization of $993.28 million, and is trading at a TTM P/E of 22.03 with expected earnings growth of 41.03% taking it to a forward P/E of 14.02 next year. MWW also trades at a premium to S&P500 TTM P/E. The PEG stands at 1.31. MWW has a low Price/Book of 0.79.

The ROE is 3.74%.

MWW is down by -67.37% year-to-date.

Much like TBI and DHX, MWW has a lot to gain from a stronger employment market, signs of which have been evident in the better jobless claims that have been reported recently. MWW was formerly a bubble, and as all high multiple bubbles, it ended up bursting. Presently, MWW no longer appears bubbly; indeed it trades at pedestrian multiples, similar to TBI’s and DHX’s – or even a bit cheaper.

The earnings and revenue estimates on MWW are undemanding, having been cut relentlessly. At this point, being a fallen angel makes it hard for MWW to attract interest, yet this company probably has more of a moat than others listed here, even though its ROE is presently very poor. The market MWW moves in, namely its well-known website for job postings, gains from network effects.

All in all, while being somewhat speculative because its profitability is presently low, a case could be made for buying MWW on the strength of the brand at somewhat of a discount in what might be an emerging better operating environment.

Conclusion

Out of this exercise, we found very different stocks with quite diverging stories, yet some struck us as possible opportunities, namely:

  • ASYS, in the event of any recovery, is trading for the cash it has on the balance sheet and would undoubtedly trade higher;
  • CFI, on a rather stable industry, at a low Price/Book, high ROE and little debt, would seem like an acquisition target on valuation;
  • LRAD, given valuation and uniqueness of technology, would seem the perfect acquisition target for a larger military supplier or conglomerate; and
  • MWW might be a long term buying opportunity on the strength of its brand and network-effect moat, even though it presently has a dismal profitability.
Source: 10 Cheap Stocks With Strong Earnings Growth