6 Value Plays With Strong EBITDA, Cash Flow, And Balance Sheets

by: Lenny Grover

We can configure the Screener.co stock screener to find companies trading on U.S. exchanges that have reasonable valuations, low debt loads, and strong cash flow. We can use the following screen:

Exchange Country
Exchange Traded On
"Over The Counter"
Current EV/Free Cash Flow
Total Debt(I)

We are requiring that companies have less debt than two times their last full year's EBITDA, to ensure their debt is serviceable, and that they have EV/FCF and EV/EBITDA multiples of less than 7. This screen returns 116 companies as of 3/13/2011. Six interesting companies returned by this screen are:

Company Name
Dell Inc.
Daily Journal Corporation
Full House Resorts, Inc.
Gravity Co., LTD. (ADR)
Western Digital Corp.
The Wet Seal, Inc.

Being a value-oriented investor, I already have positions in two of the six companies (GRVY and WTSLA). GRVY is still a profitable net-net stock, but has since gained some ground, and my entry point in WTSLA was somewhat lower than its current price. But some of the others also look interesting. The value of the Screener.co screener is twofold: It can find stocks matching a given strategy that might otherwise be overlooked, and it can quickly analyze thousands of companies to drill down to those of interest. Let's look at these six companies.

If you have never heard of Dell, you must be a Luddite! It is a company that sells PCs, servers, mobile devices, and IT services, and has a market cap in excess of $29B. It grew revenue 16.2% TTM over TTM but is still trading at an EV/EBITDA ratio of 4.9x and an EV/FCF ratio of 6.8x. Its balance sheet is reasonably strong, with net tangible assets of greater than $1B. Unless you believe that IT spending will pull back, this looks like an interesting play in the space.

Daily Journal Corporation is a newspaper holding company with an eroding core business but an incredibly strong balance sheet. This $100M market cap company has a P/E ratio of ~12, but it is sitting on an enormous pile of current assets relative to its market cap: Its tangible net worth is >$68M, almost all of it tied up in current assets. Despite revenue shrinking 8.5% TTM over TTM, it actually managed to increase its margins and earnings. This is one that seems to be worth tracking. A pure P/E screen would have missed this value play (because of its large net current assets relative to its market cap) while an EV/EBITDA screen found it.

Full House Resorts is a casino operator that is trading at an EV/EBITDA ratio of 2.9x and an EV/FCF ratio of 3x. It is involved in a number of joint ventures with other gambling related companies. I passed on FLL because of its complex corporate structure and the cyclicality of the gaming industry. However, from a purely financial perspective, the multiples these companies are trading at seem appealing.

I bought the ADR for Gravity Co. back when it was a profitable net-net stock with a larger margin of safety. While it has made share price gains since then, its revenue base has eroded, with 18% TTM over TTM revenue shrinkage. Even so, it is trading at a negative enterprise value while continuing to produce positive EBITDA and cash flow. You would not know any of this by looking at the financial statements on Yahoo Finance, however, as it does not provide quarterly data for Gravity, or many other ADRs, available.

Western Digital Corp. is a computer hard-drive manufacturer that recently announced the acquisition of Hitachi's (HIT) hard drive manufacturing arm. While this will deplete much of WDC's cash pile, its EV/EBITDA is likely will likely be even more attractive as it benefits from the synergies from the acquisition. Another Seeking Alpha contributor wrote an interesting analysis of the deal on March 9.

I bought into Wet Seal at 3.50/share less than a year ago. The company still looks attractive at the ~$3.80 level it is currently trading at. Comparable same-store sales increased 7% in February vs. the prior year according to a recent press release, and the company is set to report Q4 earnings on March 24. Also interesting is the company's balance sheet, with net tangible assets of >$270M relative to a market cap of ~$380M. Even its NNWC of >$130M (with a large portion of it in cash) is interesting for a profitable company with a $380M market cap. While the company's extremely low P/E on Yahoo Finance is misleading as a result of a one time gain, our EV/EBITDA metric still shows an EV/EBITDA of <6x -- a pretty attractive level even for a teen retailer.

Disclosure: I am long GRVY, WTSLA.