In February, I wrote a post on the conglomerate ITT Corp. (ITT) and its spin-off plan into three separate companies, Defense, Water, and Industrial Products. The market loved the announcement, sending shares of the company from $51 to a high of $64. When I wrote about ITT I felt that because of the run-up it didn't quite offer the margin of safety I was looking for.

On October 17, the spin-off will be complete. For each share of ITT, investors will receive one share of Defense and one share of Water. Additionally, the remaining ITT shares will be reverse split on 1:2 basis. The Defense business will be called Exelis, Water will go by Xylem, and the industrial products division will creatively be christened ITT. Since the initial announcement, the company has performed well, growing revenue and profits despite the uncertain economic environment and the certain distraction the corporate restructuring

ADDvantage Technologies Group (AEY), a distributor of cable equipment (think set top boxes, encoders, etc) to large and small cable companies, reported a nasty looking Q2 earnings report last week.

Sales were down 16%, margins decreased, and every product category showed a decline compared to last year.

I was a buyer. Why?

In this market, it is difficult to find a company with strong cash flow, margins, and return on capital at a cheap price. After the shares declined 14% on the earnings news, AEY is cheap by almost any measure.

With a PE of 7 and an EV/EBITDA of 4, AEY currently sells below book value and around its net current asset value. These multiples are typically seen on companies that are in danger of bankruptcy, not a company that has delivered positive free cash flow in each of the last ten years- even in the meltdown of

In this article, the third and final in the series, I cover the final 8 companies featured in Barron's LBO candidate list. Parts I and II are here and here.

Men's Wearhouse (MW): The stock price of the men's clothier jumped 38% in the past year and appears pricey at today's levels. A PE of 26 and EV/EBITDA of 8.2 makes the company overvalued compared with other retailers on this list.

Molex (MOLX): MOLX makes small electronics components like SIM card sockets and internal antennas. Like other contract manufacturers, profits fell off in 2008, and 2009, but have risen back to pre-recession levels. A private equity firm may be able to squeeze higher margins from the operations by cutting out some of the high SG&A expense and increase the firm's value. However, if MOLX maintains the status quo, I think the company is overvalued at $27, suggesting

Last week, Barron’s published an article featuring 27 potential LBO candidates. Easier credit, low rates, and growing cash piles are increasing private equity activity and make these 27 companies attractive targets. Using historical financial statements, I evaluated each of the firms on the list to see if any deserve further consideration in a value investor’s portfolio.

Advance Auto Parts (AAP): The automotive parts retailer has consistently generated 20%+ returns on equity over the last ten years due to good management and inventory control. The recession led to a rise in the average age of cars on the road and AAP set a record high in revenue last year because of it. At some point people will replace their old cars, so an investor will need to estimate normalized sales for AAP. Based on long term averages of free cash flow margin, I think the stock

Benjamin Graham liked cheap stocks. He especially liked stocks that sold below their net current asset value. Why?

Let’s say you own a small, neighborhood bar. You have a few regular customers, can get a good crowd if you can find a decent band to play on Saturday night, and despite the ups and downs, the bar generally brings in enough money to pay the bills. But would you sell if someone came in on a slow night and offered to buy it for less than the value of the cash in the register and the bottles of liquor on the shelf? The answer is no, unless you were a very desperate seller.

The stock market often prices companies below the value of cash, inventory, and receivables, minus debt: A.k.a. net current asset value (NCAV). Graham liked to buy a diversified basket of these companies he called “net-nets” at 66%

Recently, industrial conglomerate ITT (ITT) announced they will split the company into three separate businesses: Defense, Water, and Industrial Products (The “New” ITT). The stock immediately jumped 20% in anticipation of the spinoffs, which are expected to be completed by the end of the year. After such a run-up, can a value investor still profit? I’ll take a look at each of the three businesses and attempt to value them.

Sometimes, valuing spinoffs early in the process can be difficult due to lack of individual segment data. Fortunately, ITT broke down the key financial information for each business in previous financial statements. I will value each business in three different ways: by applying a multiple of 15x “Owner’s Earnings” (Net Income + Depreciation – Capital Expenditures), 10x EBIT, and a multiple based on similar publicly traded competitors. I chose 15x OE and 10x EBIT as a starting