3 Long Ideas: Mitcham Industries, Key Technology and New Frontier Media

It has been about four months since my last installment of stocks to watch. In terms of names that were added to the portfolio that were mentioned in the article and which are available in real-time to subscribers - I added Allied Defense Group in prices ranging from roughly $5.40 to $6.30 with the stock currently selling for $6.35. I remain very positive on the stock which is finishing up a major reorganization and has record backlog which is well over the market capitalization of the stock. As Allied Defense Group (ADG) starts to work off this backlog we are likely to see a significant increase in profitability and cash flows for the company. I also uncovered a couple of other stocks following my initial post which were added to the portfolio.

I thought it would interest some folks to discuss 3 ideas for longs which will be followed later in the week by 3 shorts. I would note that the long ideas are early in the process and I may or may not add these to the overall portfolio but they are initially screening well.

1) Mitcham Industries: (MIND): $19.28 - The company leases and sells geophysical used primarily for seismic data on land, marsh and marine areas. 70% of the company's growth is coming from overseas as exploration in the energy area continues to rapidly grow with higher oil prices. The company has targeted ROIC in the 15% range. The overall mix of lease vs. sale has shifted so that sales are now actually slightly larger than lease but the company is growing in both areas. The company has a strong balance sheet and has also delivered strong cash flows.

2) Key Technology: (KTEC) : $31.52 - This is a 60 year old company based out of Walla Walla, Washington. The company designs and manufactures process automation systems focused primarily on the food industry. The technology (mostly optical sorters) are sold to a who's who of food processing companies such as Del Monte, Campbell Soup, Ocean Spray, Ore-Ida and many others. More than 40% of sales have typically occurred overseas.The company looks attractive fundamentally with a strong balance sheet.

One of the main components of a company's financial statements, the balance sheet provides an overview of the company's assets (what it owns) and liabilities (what it owes) at the end of a financial year. with $5 in cash, no debt and a healthy ROE.

3) New Frontier Media:(NOOF):$5.06 This is an adult entertainment company focused on adult pay per view services. The company has a strong dividend and a good balance sheet. I will be looking at their next earnings report for signs of top and bottom line growth as they stated in their last conference call and I would like to see them expand their business lines to reflect improvements in technology.
I am also starting to see some opportunities appear in regional banks and select rent-to-own businesses.

As always, I am examining several other names in addition to the large amount of time that I spend on maintaining due diligence on my existing portfolio.

Comments

[Barry Robbins:]

Thanks for the write-up. I used to own Mitcham. I think 3D-seismic is a very interesting "Peak Oil" sector play. In a world with declining oil reserves, I think 3D-seismic companies will become very important. I currently own BOLT and OYOG. Do you have an opinion on either of these?

Also, I owned NOOF for a while (after reading Joel Greenblatt's "Little" book). The stock never made much progress while I owned it.

2008 Apr 30 04:07 PM

[Kiisu:]

Looked at NOOF earlier this year. I liked the zero debt and decent dividend... but could not (and still cannot) figure out how that was possible with a 246% dividend payout ratio.

And because I did not (and still do not) understand such magical processes, I've stayed away. (stats from finance.yahoo.com/q/ks...)

Any enlightening explanations would be appreciated.

Kiisu.

2008 May 01 02:43 AM

[Dan Weiss:]

Barry

I will take a look at those stocks over the next couple days and give you my opinion- I only have a small knowledge on the names and like to have a more complete knowledge before giving my opinion.

2008 May 01 09:40 AM

[Dan Weiss:]

Kiisu

I agree about the dividend yield although the company does have about 80 cents per share in cash along with the regular quarterly cash flows so if they want to they could continue it for several more quarters. That being said, I think they would be wise to lower the dividend and explore some growth opportunities with some of the cash left over. At $5 per share with 80 cents of cash and no LTD you have a stock selling at roughly $4.20 backing out cash giving the stock a p/e likely in the high single digits on next years results.

2008 May 01 09:44 AM

[Dan Weiss:]

Looks like KTEC is up about $4 today on strong results.

2008 May 01 09:45 AM