Beware of Surprises: 9 Companies With Tight Margins and High P/Es

by: Investment Underground

by Roger Choudhury

Dole Foods (NYSE:DOLE) had an EBT margin of 0.57% for the trailing 12 months. In 2009 and 2008, the figures were 1.44% and 1.21%, respectively. Revenues fell by 11.04% to $6.78 billion in 2009, and revenues are up by only 1.6% for the first 9 months of 2010 compared to the same period in 2009. For the trailing 12 months, EPS was 0.22, which implies a P/E of 63.4. In comparison, Nestle (OTCPK:NSRGY), Heinz (HNZ), Kellogg (NYSE:K), and Kraft (KFT) trade with P/Es of 16.7, 16.1, 16.4, and 21.7, respectively.

Dole is the world's largest producer and marketer of high-quality fresh fruit and fresh vegetables. Year-to-date, DOLE is up 3.3%.

Graphic Packaging (NYSE:GPK) had EBT margins of 0.8% and 1.93% in 2010 and 2009. Revenue growth was flat in 2010 by drawing in $4.09 billion, after growing by 0.40% in 2009 and 68.49% in 2008. Also in 2008, EPS was $0.32. Additionally, after falling from $0.16, EPS was $0.03 in 2010, which implies a P/E of 178.6. In comparison, Boise (NYSE:BZ), Packaging Corp. (NYSE:PKG), and Amcor (OTCPK:AMCRY) have P/Es of 12.1, 14.2, and 44.1, respectively. The company also has a debt to equity ratio of 5.00. It intends to reduce debt by $200 to $200 million in 2011.

Graphic Packaging Holding Company, headquartered in Marietta, Georgia, is a leading provider of packaging solutions for a wide variety of products to food, beverage and other consumer products companies. The company is one of the largest producers of folding cartons and holds a leading market position in coated-recycled boxboard and specialty bag packaging.

Since the February 24 earnings release, share price is up 6.2%.

B&G Foods (NYSE:BGS) had EBT margins of 9.57%, 5.72%, and 3.25% in 2010, 2009, and 2008, respectively. Revenues came in at $513 million in 2010, which was an increase of 2.46%, after growing by 2.90% in 2009. However, EPS grew by 52.27% in 2010 to $0.67, which implies a P/E of 26.9. In 2009 and 2008, EPS was +66.04% and -50.93%, respectively. EBITDA for FY 2011 is expected to be approximately $123.0 to $126.0 million, after posting $119.7 million in 2010. The company also has a debt to equity ratio of 3.51.

B&G Foods manufactures, sells and distributes a diversified portfolio of high-quality, shelf-stable foods across the United States, Canada and Puerto Rico. B&G Foods' products include hot cereals, fruit spreads, canned meats and beans, spices, seasonings, hot sauces, wine vinegar, maple syrup, molasses, salad dressings, Mexican-style sauces, taco shells and kits, salsas, pickles, peppers and other specialty food products. B&G Foods competes in the retail grocery, food service, specialty, private label, club and mass merchandiser channels of distribution. Based in Parsippany, New Jersey, B&G Foods’ products are marketed under many recognized brands, including Ac'cent, B&G, B&M, Brer Rabbit, Cream of Rice, Cream of Wheat, Don Pepino, Emeril's, Grandma's Molasses, Joan of Arc, Las Palmas, Maple Grove Farms of Vermont, Ortega, Polaner, Red -Devil, Regina, Sa-són, Sclafani, Trappey's, Underwood, VermontMaid and Wright's.

Since the earnings release on March 1, BGS is up 25.2%.

Chart Industries (NASDAQ:GTLS) had an EBT margin of 5.13% in 2010, after making 14.29% in 2009. Revenues fell by 6.10% to $555 million in 2010, after decreasing by 20.53% in 2009. EPS dropped by 67.3% in 2010, and fell by 22.43% in 2009. Shares trade under a P/E of 65.4 with EPS at $0.69. Also, the current ratio is 2.37.

The company's guidance for 2011:

Global markets are expected to continue their recovery during 2011 with the return of significant project work in our E&C [Energy & Chemicals] business and continued growth in LNG-related orders in our D&S [Distribution & Storage] business. Order rates improved throughout 2010, and this is expected to continue in 2011. Based on our current backlog and order expectations, 2011 net sales are expected to be in a range of $710 to $750 million. Diluted earnings per share for 2011 are expected to be in a range of $1.50 to $1.70 per share based on approximately 29.5 million weighted average shares outstanding. Included in our 2011 earnings estimates are approximately $0.20 per diluted share for anticipated restructuring charges for the recently completed SeQual acquisition and trailing costs associated with the shutdown of the Plainfield, Indiana facility acquired from Covidien. Excluding these charges, earnings would be expected to fall in a range of $1.70 to $1.90 per share.

Chart Industries is a leading independent global manufacturer of highly engineered equipment used in the production, storage and end-use of hydrocarbon and industrial gases. The majority of the company's products are used throughout the liquid gas supply chain for purification, liquefaction, distribution, storage and end-use applications, the largest portion of which are energy-related. Chart has domestic operations located throughout the United States, including its principal executive offices located in Garfield Heights, Ohio, and an international presence in Asia, Australia and Europe.

Share price is up 18.6% since the earnings release on February 24.

Hughes Communications (NASDAQ:HUGH) had EBT margins of 2.18%, -4.89%, and 1.65% in 2010, 2009, and 2008. Revenues did grow by 11% to $791.3 million in 2010, after falling by 4.78% in 2009 and increasing by 9.24% in 2008. EPS stood at $1.00 in 2010, after posting - $2.46 in 2009 and $0.44 in 2008. P/E currently is 59.8. Also, a peer, Iridium Communications (NASDAQ:IRDM) trades at a P/E above 90.

Hughes is the world’s leading provider of satellite broadband for home and office, delivering innovative network technologies, managed services, and solutions for enterprises and governments globally. HughesNet is the #1 high-speed satellite Internet service in the marketplace, with offerings to suit every budget. To date, Hughes has shipped more than 2.5 million systems to customers in over 100 countries, with 6 representing over 50% market share. Its products employ global standards approved by the TIA, ETSI, and ITU organizations, including IPoS/DVB-S2, RSM-A, and GMR-1.

Shares are flat, since the earnings release on March 3.

Mentor Graphics (NASDAQ:MENT) had EBT margins of 5.43%, -2.45%, -9.88%, and 6.36% in years ending in January 2011, 2010, 2009, and 2008. Revenues grew by 17.2% in FY 2011, after growing by 1.73% in FY 2010, and falling by 10.3% in FY 2009. EPS improved to $0.25 in FY 2011, after being in the red by $0.23 in FY 2010 and posting -$0.97 in FY 2009. P/E stands at 73. In comparison, Quest (NASDAQ:QSFT), Compuware (NASDAQ:CPWR), and Qlik (NASDAQ:QLIK) have P/Es of 25, 23.1, and 174.2.

Mentor is the third-largest electronic design automation firm by sales, specializing in various tools that help design printed circuit boards, integrated circuits, and field-programmable gate arrays. The company's products also help designers simulate and verify its designs in new products.

MENT is up 2.1%, since the earnings announcement on February 24.

JDS Uniphase (JDSU) grew 33.7% in revenues in the trailing 12 months through December 2010, after falling 5.37% in FY 2010 through June 2010. The company brought in $1.6 billion in revenues, and made $13 million. In contrast, the Company lost $62 million in FY 2010. The profit margin was 42.38%, and 40.1% in FY 2010. The EBT margin was 1.08%, but - 4.19% in FY 2010. The ROIC was 1.1%, but - 5.2% in FY 2010. The current ratio is 2.93 with a D/E of 0.29. After 10 straight years of negative EPS, through December 2010, it was $0.06. So, shares have a P/E of 428.

For Q3 2011, assuming the company makes $440 million in revenues with an 11% operating margin, a conservative EPS estimate would be $0.175, making an EPS of $0.295, for the trailing 12 months. Juxtapose that with - $0.56 for the same period through Q3 2010. The company seems to be turning a corner. Additionally, the 30 day put/call ratio is a bullish 0.4.

The most recent quarter (Q2 2011) posted record revenues of $477.2 million. As so, this company was featured in “What You Need to Know About These 11 Tech Bellwethers in 2011.”

Verigy (NASDAQ:VRGY) had an EBT margin of 3.53% in the full year through October 2010. The same figure in 2009 was -38.08%. However, revenues grew by 66.87% to $539 million in FY 2010, after falling 53.26% in FY 2009. EPS recovered from - $2.17 to $0.26 in FY 2010, implying a P/E of 53. Keep in mind that EPS in 2007 was $1.61. Moreover, Q1 2011 revenues are up $14 million from Q1 2010.

The company supplies automated test equipment to the semiconductor industry. Its tools are used to test a wide range of integrated circuits, such as memory, digital, analog, radio frequency, and system-on-a-chip devices. The company also offers support services to assist customers in developing and implementing test solutions for semiconductors, from the design to manufacturing stages. The company is based in Singapore.

It is in discussions to be acquired by Advantest (NYSE:ATE) for $15.00 per share. The Verigy Board of Directors is in the process of reviewing Advantest's proposed agreement and continues to engage with Advantest in due diligence, business analysis and management meetings. The Verigy Board has not made any recommendation with respect to the Advantest proposal.

Since the offer on January 26, VRGY is up 2.1% to $13.35.

LSB Industries (NYSE:LXU) had EBT margins of 7.95% and 6.75% in 2010 and 2009. Revenues grew by 14.68% to $610 million, after falling by 28.99% in 2009. Also, in 2010, EPS grew by 37.5% to $1.32, which implies a P/E of 26.4. The current ratio is 2.74.

Company commentary on the 2010 fiscal year can be found here.

The company is engaged in 3 business segments: chemical, climate control, and industrial products. Its chemical business manufactures and sells chemical products for the agricultural, mining, and industrial acids markets. The climate control segment manufactures and sells hydronic fan coils and water source heat pumps. Its industrial products segment purchases and sells machine tools.

Since the earnings announcement on March 3, LXU shares are up 13.5%.

Hanger Orthopedic (HGR) provides medical rehabilitation products and services. The company designs, fits, and supervises the use of custom-made braces, supports, and artificial limbs. It provides services to patients in hospitals, nursing homes, physician's offices, and through more than 600 company-owned patient-care centers.

Revenues increased by 7.5% to $817.3 million, after growing by 8.1% in 2009 and +10.32% in 2008. However, the EBT margins in 2010, 2009, and 2008 were 4.3%, 7.89%, and 6.32%, respectively. EPS dropped by 42.4% in 2010 to $0.65, after jumping by 44.87% in 2009 and increasing by 21.88% in 2008. P/E stands at 41.8.

In 2011, the company expects revenues to be between $945 million and $955 million and EPS in a range of $1.63 to $1.68. The company also has a goal to increase operating margins by 20-40 basis points in its core business.

Hanger Orthopedic Group is headquartered in Austin, Texas. It is the leading global provider for services and products that enhance human physical capability. Hanger provides orthotic and prosthetic (O&P) patient care services, distributes O&P devices and components and provides therapeutic solutions to the broader post acute market. Hanger is the largest owner and operator of orthotic and prosthetic patient care centers with in excess of 675 O&P patient care centers located in 45 states and the District of Columbia. Hanger, through its subsidiary Southern Prosthetic Supply, is also the largest distributor of branded and private label O&P devices and components in the US.

Hanger provides therapeutic solutions through its subsidiaries, Innovative Neurotronics and Accelerated Care Plus. Innovative Neurotronics introduces emerging neuromuscular technologies developed through independent research in a collaborative effort with industry suppliers worldwide. Accelerated Care Plus is a developer of specialized rehabilitation technologies and the nation's leading provider of evidence-based clinical programs for post-acute rehabilitation serving more than 4,000 long-term care facilities and other sub-acute rehabilitation providers throughout the U.S.

On the other hand, some reliable and bullish companies that you should consider are here: “10 Warren Buffett Stocks with Highest Returns on Invested Capital,” and here “Rare Earth Mineral Resource Index Triples in Value Since China’s Announcement.”

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.