Since 1972, Charles M. Royce has been the President and Co-Chief Investment Officer of Royce & Associates, LLC and President of The Royce Funds. He has been investing during the last 49 years. Besides, he has 39 years of experience as value portfolio manager in a small company.
In order to measure the enterprise value of a company, Royce Funds take into account either what they consider that a buyer may pay to obtain the company or what they think the value of the company could be in the Stock Exchange.
Royce's value approach deals with/highlights:
- Knowing about the enterprise value of a company
- Looking for the correct mix of financial features versus stock price
- Finding not only statistically inexpensive stocks but also valuation discrepancies
When investing I view myself as a business analyst, not market or macroeconomic analyst. This means that I invest with the perspective of a businessperson. I look at the business holistically, examining all quantitative and qualitative aspects of its management, financial position and its purchase price. I think that Charles Royce also shares this fundamental view. That is why I find interesting to research his holdings and see which of his picks I could research further.
Lincoln Electric (LECO)
Lincoln Electric, with its central office in Cleveland, Ohio, has 38 manufacturing locations with operations and joint ventures in 19 countries and a global network of distributors and sales offices.
The main activity of Lincoln is to manufacture and resell welding and cutting products. Its Welding products (welding power sources, wire feeding systems, robotic welding packages, fume extraction equipment, consumables and fluxes to regulators and torches) are employed in cutting. The degree of the technology employed on the products goes from basic units for light manufacturing to sophisticated robotic applications for the high-production welding and fabrication.
One of the reasons I found attractive about Lincoln Electric business is that the company is a global leader in the market of brazing and soldering amalgamation; besides, Lincoln focus on acquisitions to vertically integrate its operations to obtain scale benefits and extend its product portfolio and markets.
By building manufacturing facilities with the low cost bases of Eastern Europe, Lincoln expects to become more cost-competitive and improve its operations. At the same time, Lincoln Electric is also applying several cost control measures which I think will generate further earnings growth in the future.
Another reason for investing in Lincoln is that products from Lincoln Electric are each day more demanded what make me think that they will be an important growth on the heels of an economic improvement and investments in the new markets.
What is more, Lincoln's 2011 sales mark the second consecutive year over year increase of more than 20% with the highest level in Company history according to what the Chairman and Chief Executive Officer, John M. Stropki, has said in the last earnings call:
We keep focusing on strategies to grow worldwide which include purchases, introductions of new products and incrementing our commercial presence. Our permanent attention to the constant improvements in our business and operations divisions will give us the flexibility and increased operating influence we need to carry out our long term strategic goals for the benefits of our clients, shareholders and employees.
It is important to analyze the fourth quarter in which the net cash provided by operating activities increased from $9.9 million to $63.1 million from $53.3 million for the comparable period in 2010. What is more, the company also returned $22.3 million to shareholders through the payment of $12.9 million in dividends and the repurchase of $9.4 million or 255,912 shares.
LECO's current net profit margin is 8.06%, currently higher than its 2010 margin of 6.29%. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened.
Current return in equity for LECO is 18.8 higher than the +20% standard I look for in companies I invest and also higher than its average ROE of 11.81%.
In terms of income and revenue growth, LECO has a 3 year average revenue growth of 2.82 and a 3 year Net Income average growth of 0.76%. Its Current Revenue Year over Year growth is 30.16, higher than its 2010 Revenue growth of 19.71%. The fact that revenue increased from last year show me that the business is performing well. The current net income year over year growth is 66.75%, lower than its 2010 Net Income y/y growth of 168.12%.
In terms of valuation ratios, LECO is trading at a Price/Book of 3.2 x, a Price/Sales of 1.4 x and a Price/Cash Flow of 19.7 x in comparison to its industry averages of 2.1x Book, 1.3 x Sales and 20.0 x Cash Flow. It is essential to analyze the current valuation of LECO and check how is trading in relation to its peer group.
As regards valuation, we can say that during the last five years, Lincoln's shares have traded between 5.7x to 31.3x trailing 12-month earnings. At the moment, LECO'S shares are trading at 15.7x consensus 2011 EPS estimate of $2.46. The current trailing 12-month earnings multiple of the company is 16.9, compared to 48.1 peer group average and 17.2 for the S&P 500.
Reliance Steel (RS)
Los Angeles, California-based Reliance Steel & Aluminum Co. operates as a metals service center company which activities are related to value-added materials management and metals processing services. RS has around 100,000 metal products distributed among its 125,000 industries around the globe.
RS comprises 200 distribution and processing centers in 38 states of the US and in other countries. Despite being present in several countries, most of RS' sales are from the Southeast US.
Reliance Steel has a strategy of growing through acquisitions. One example is the acquisition of Diamond Consolidated Industries (now known as Diamond Manufacturing Company) on October 1,2010 and Lampros Steel, Inc. on December 1, 2010. The first one manufactures and trade specialty engineered perforated metals while the second one, located in Portland, Oregon operates as a subsidiary of its American Metal business and works with structural steel shapes and coal steel plate. RS has bought all the magnificent capital securities of Continental Alloys & Services, Inc (Continental), main office in Houston, Texas, and some affiliated companies. Thanks to funds proceeds from the revolving credit facility, the acquisition was funded.
RS Current Net Profit Margin is 4.23%, currently higher than its 2010 margin of 3.08%. I like companies that increased profit margins in comparison to other years. Current return in equity for RS is 11.52 lower than the +20% standard I look for in companies I invest in, but higher than its average ROE of 7.16%.
In terms of income and revenue growth, RS has a 3 year average revenue growth of- 2.29 and a 3 year Net Income average growth of -10.7% Year Average. Its Current Revenue Year over Year growth is 28.86%, higher than its 2010 Revenue growth of 18.7%. The current net income year over year growth is 76.85%, lower than its 2010 net Income y/y growth of 168.12%.
In terms of Valuation Ratios, RS is trading at a Price/Book of 1.3 x, a Price/Sales of 0.5 x and a Price/Cash Flow of 17.9 x in comparison to its industry averages of 1.1x Book, 0.6 x Sales and 14.9 x Cash Flow. As we can see, Reliance's multiples does not seem cheap compared to its industry.
Teradyne Inc (TER)
Teradyne Inc., central office in North Reading, Massachusetts, is a leader in providing automated test equipment. Its main activity is semiconductor test market, which produces the majority of its revenue. It supplies specialized system testing equipment for specific end markets as well.
It is important to consider that Teradyne expanded the total available market in 2011 with some products gaining momentum. It is a fact that the HDD business in especial is emerging as a clear winner, with fourth quarter sales coming much more better than expected, followed by three quarters of strong performance.
The flooding in Thailand has had a positive impact on its business and has encouraged the capacity-driven spending that is leading to longer-term opportunities for Teradyne. So, it is important that the revenue growth keeps its strength along the year.
Memory is another market showing an important opportunity of growth. Despite its market share being small (in the mid-teens percentage range), Teradyne has been making strides with some of its new products. The most important advantage of Teradyne is that its products are scalable and the frequency range offered allows very high-speed testing that can be scaled up to test DDR3 formats or even DDR4.
The business of Teradyne in the DRAM category is slow because of the few customers the company has there. However, Teradyne has a stronger position in NAND, which is supposed to be relatively better this year. As end demand is strong, some growth is sure to come even though spending on test infrastructure remains conservative.
Expanding Teradyne's presence in the fast-growing wireless testing market (new area for the company), the acquisition of Lite Point is another positive aspect. It is good to consider that the product line will allow easy integration and minimum customer overlap. Lite Point will also enable to obtain revenue from smartphones and tablets markets which are usually markets with much stronger growth than the traditional markets of the company. Besides, Lite Point will add $130 million to revenue in 2012 and a more powerful gross margin than the main business: what will also increase taxes, though.
Teradyne's current Net Profit Margin is 26.16%, currently higher than its 2010 margin of 23.61%. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Current return in equity for Teradyne is 28.46 higher than the +20% standard I look for in companies I invest in, but lower than its average 2010 ROE of 42.5%.
Its current revenue year over year growth is -8.75, lower than its 2010 revenue growth of 91.13%. I do not like when current revenue growth is less than the past year.
In terms of Valuation Ratios, Teradyne is trading at a Price/Book of 2.1 x, a Price/Sales of 2.7x and a Price/Cash Flow of 13.9 x in comparison to its Industry Averages of 2.7x Book, 1.9 x Sales and 9.0 x Cash Flow. It is essential to analyze the current valuation and check how is trading in relation to its peer group.
At the end of 2011 Teradyne had $755 million in cash and investments and debt of $163 million on its balance sheet; what leads to say that the firm is in good financial conditions.
Pan American Silver (PAAS)
Pan American Silver is a company in the area of mines and its main target is silver. The main goal of Pan American Silver Corp is to become the best intermediary for equity investor in order to get real exposure to higher silver prices. To accomplish its goal, the company is trying to increase its low-cost silver production. This fact will allow the firm to have the best silver exploration programs, to hold the largest silver capital and resources, and to be the most genuine silver producers worldwide.
Pan American not only runs successfully several silver mines in the regions of South Africa and South America but also it has increased its silver production from 7.1 million ounces in 2002 to roughly 22 million ounces in 2011,as a consequence of a very well-developed schedule of development. Although the silver mining industry does not consider Pan American to be a low-cost producer, the costs of production of the firm are roughly in line with the industry average for primary silver miners.
As long as silver prices cooperate, Pan American Silver is well positioned to generate substantial profits.
It is also important to highlight that the firm has brought its near-term projects online with the San Vicente expansion project in late 2008 and the Manantial Espejo mine in early 2009. Nonetheless, a few projects further down the pipeline could generate substantial silver output growth. La Preciosa project in Mexico and the Navidad deposit in the Chubut province of Argentina (this last one acquired via purchase of Aquiline Resources in October 2009) are both the most significant ones.
Pan American's silver production by 2016 could be incredible doubled as a consequence of the impact of these two projects. Nonetheless these possible aspects, The company has to carry out a viable study on its project of La Preciosa while it is waiting for the government of the province of Chubut to retract its ban on open-pit mining in order for the Navidad project to be carried out.
PASS Current Net Profit Margin is 41.21%, currently higher than its 2010 margin of 17.81%, I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened.
In terms of income and revenue growth, PAAS has a 3 year average revenue growth of 36.19 and a 3 year net income average growth of 142.88% year average. Its Current Revenue Year over Year growth is 32.28, lower than its 2010 revenue growth of42.16%. I do not like when current revenue growth is less than the past year. It generally shows that business is decelerating for some reason.
In terms of Valuation, PAAS is trading at a Price/Book of 1.4 x, a Price/Sales of 2.7 x and a Price/Cash Flow of 6.4 x in comparison to its industry averages of 2.4x Book, 6.1 x Sales and 13.4 x Cash Flow. Pan American had no debt and a cash of $485 million at the end of 2011. It also produced strong cash flows in 2011 as a consequence of the high prices of the precious metals. Thus, I believe the company holds a strong financial position.