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I've been working my way through small-cap value stocks the last few weeks, and these two have risen to the top. The screens focused on stocks with manageable debt to equity ratios, good price to free cash flow ratios, cash on hand, and return on equity. Kulicke and Soffa Industries (NASDAQ:KLIC) and EZCORP (NASDAQ:EZPW) offer good long term free cash flow growth and deep value. I ran a discounted free cash flow valuation analysis at 12% discount rate for both companies.

Kulicke and Soffa Industries, Inc. designs, manufactures, and markets capital equipment and packaging materials for semiconductor devices. Kulicke fundamentals are excellent: a market cap of $717 million, $151 million in free cash flow, $381 million in cash on hand, and no debt. Growth has been good, but not stellar, with five year free cash flow growth at about 11%. I expect that to increase in the next five years as sector demand picks up. Looking at the discounted free cash flow valuation, we can run several scenarios. If we give Kulicke a pessimistic growth rate of 0% over the next 10 years, I place fair value at $21.44, with a 55% margin of safety at today's price of $9.67. If we give Kulicke a modest growth rate of 5%, we get a fair value of $26.36 and a 63% margin of safety. At a more optimistic growth rate of 15%, I place fair value at $41.52 with a 77% margin of safety. I prefer the conservative 5% growth projection, and at least a 50% margin of safety; that would put a buy price at $13.10 or under.

EZCORP, Inc., provides specialty consumer financial services via a chain of owned and operated pawn shops. EZ has excellent fundamentals, with a market cap at about $998 million, $102 million in free cash flow, $50 million in cash on hand and $200 million in debt. The debt to cash ratio of 4 is a little higher than I would like, but the valuation makes it acceptable. EZ has five year free cash flow growth at about 34%. That is exceptional growth, but not necessary for buying at today's price of $19.50. If we discount growth to 15%, that would give us a fair value of about $46.76 and a 58% margin of safety. If growth slows to 25%, that would still give us fair value at $82 and a 76% margin of safety. Going with the 15% growth projection, and a 50% margin of safety, I would set a buy price at $24.80 or under.

Source: 2 Deep-Value Small Caps