The Price/NCAV ratio can be a useful tool in the toolbox for identifying quality stocks at a good price.
After a quick overview of the Price/NCAV ratio, the ratio is applied to twenty-five stocks screened for both growth and dividend growth.
Six companies are highlighted as examples.
Benjamin Graham wrote in his book The Intelligent Investor:
It always seemed, and still seems, ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone-after deducting all prior claims and counting as zero the fixed and other assets-the results would be quite satisfactory.
This still seems ridiculously simple to say, and lies near the heart of value investing. The basic formula of net current asset value (NCAV) is:
- NCAV = current assets - total liabilities.
Divide NCAV by the total shares outstanding, to find NCAV/share:
- NCAV/share = (current assets - total liabilities)/outstanding shares
This result can be compared against the stock price. If the stock price is less than the NCAV/share, buying shares would theoretically prove, in Graham's words, "quite satisfactory."
Graham's Net-Net Working Capital calculation, NNWC, is an even stricter measurement than NCAV. The theory behind NNWC is that if a company is liquidated, the calculation expects that only 75% of accounts receivable will be realized, and only 50% of the value of inventory.
- NNWC = ((0.75 * accounts receivable) + (0.50 * inventory) + remaining current assets) - total liabilities
However, Graham used the net-net approach in an era before information and computers were so readily available. Today, net-net stocks are not pretty. They are typically companies that are facing significant problems, whether internally or from the macro environment. Net-net investors recommend buying shares of a large number of companies to reduce risk.
Those who like fundamentally solid growth companies as I do will likely never find a true net-net stock, even by using the less restrictive NCAV formula. Nor will dividend growth investors likely find a net-net stock. However, if the goal to buy at a Price-to-NCAV Ratio of 1.0 or less is removed, the Ratio can still be useful, particularly when it is combined with other ratios such as ROE.
The NCAV Ratio Applied to 25 Companies
The NCAV Ratio was applied to twenty-five companies. These companies were screened for both growth and dividend growth with the following criteria:
- An ROE of 14% or greater. This is the long-term average of the S&P 500. All the companies on the list also have an ROA of more than 9.0, which is not shown on the chart, even though I prefer ROA over the ROE for analysis.
- Revenue growth in at least three of the last four years.
- EPS growth in at least three of the last four years.
- Dividend growth for the last five years.
- A positive NCAV. If current assets are less than total liabilities, the NCAV would be negative, and of no value in this analysis.
- Debt:EBITDA less than 1.0. This check is typically unnecessary with positive NCAV, but it is nevertheless a good check to be sure management has a firm rein on debt.
This screen results in a list of companies that are both growing and are growing dividends. The Price/NCAV ratio is applied to the list and the result is given below. Price-to-Cash Flow, the ROE, and the number of years of dividend growth are also given. Each ratio in the chart is divided into approximately thirds: the top tier is marked in green and the bottom tier is marked in red. The top numbers in each column have been bolded.
Price to NCAV chart. Stock price from BigCharts.com. Balance sheet and Income figures from Morningstar.com. Price/Cash Flow data from SeekingAlpha.com. ROE data from GuruFocus.com. Dividend Growth data from U.S. Dividends Champions chart prepared by The DRiP Investing Resource Center, and by the Canadian Dividend All-Star List. As always, please do your due diligence to verify figures provided by platforms.
Let us now take a closer look at some selected stocks from this chart.
Universal Forest Products
In 2016, I made two observations:
- A sweet spot for Price/NCAV seems to be between 2.0 and 7.0. A price of less than 2.0 may indicate a company that is facing trouble.
- Price swings do not significantly affect the Price/NCAV Ratio of a company when compared to other companies' ratios.
These two observations appear to have been proved out while I was writing this article. I gathered the data for the chart above between October 21st and 22nd. The Price/NCAV for Universal Forest Products (UFPI) was 6.03 then, within the "sweet spot" that I suspected I had found in 2016. Then while I was writing this article, the company reported results, and the stock price jumped from $41.62 to $50.26.
The jump in stock price changed UFPI's Price/NCAV from 6.03 to 7.28. While this is a significant change in the company's Price/NCAV Ratio, it did not make a substantial change in the ranking in the Price/NCAV chart above.
UFPI sells both lumber and treated wood products. Their Dimensions Project Panels (plywood) and Deckorators (decking) are cited as growth products. The catalyst for the big jump in UFPI's stock price was the report of record quarterly earnings, but it might be argued that other conditions were favorable for the jump. It had a comparatively low Price/Cash Flow, the second-lowest on the Price/NCAV chart above. 16 consecutive years of dividend increases make it attractive for dividend growth investors.
Johnson Outdoors (JOUT) is a manufacturer of outdoor products that appeal to both baby boomers and millennials. The stock price is down a third from its high in May, possibly related to fears of increased competition from Garmin (GRMN) in fishing products.
Indicators in the Price/NCAV chart are similar to those of UFPI before UFPI's stock price jumped. Johnson Outdoors' Price/NCAV is half of what UFPI's is, with 2.84 still being in the sweet spot between 2.0 and 7.0. It also has a better Price/Cash Flow ratio than UFPI. Johnson Outdoors does not have the years of dividend growth that UFPI does, but 7 years still puts it on the radar for dividend growth investors.
The company reportedly has "an exciting pipeline of new products on the horizon." New products could provide a catalyst for the stock price to regain its high, a 50% increase from its current price.
Armanino Foods (OTCPK:AMNF) is a manufacturer of pesto and other sauces. It is a favorite company of mine, and I have written about it in more detail here. It has been something of a defensive stock in my portfolio; the share price tends to remain level or even increase when the general market struggles.
The Price/NCAV for Armanino Foods is not in the 2.0-7.0 sweet spot range in the chart above, but it is still in the top third tier. Its ROE of 37.91 is more than double of any other stock within the tier, and the fourth-highest ROE in the chart. It also has 14 consecutive years of dividend growth.
The dip in the chart is the result of the most recent earnings report, and it may provide an opportunity to open a position or add shares.
One of the companies with a much higher Price/NCAV than others in the chart is MarketAxess (MKTX), a company involved with an electronic trading platform for fixed-income markets, especially bonds.
It has a Price/NCAV of 66.48. This is not necessarily a bad number; the company still has more current assets than total liabilities, a feat few companies achieve. A look at the other metrics on the chart shows a Price/Cash Flow at 63.22 which is not impressive. Investors are not looking at that metric, though, they are looking at the ROE of 30.47, and especially at the growth potential.
Similarly, Computer Services (OTCQX:CSVI) has a higher Price/NCAV of 44.05, and yet it has 48 years of consecutive dividend growth, a distinction very few companies will ever equal. It is a microcap in size, but it is growing and expanding into new regions. It is a favorite stock in my portfolio, and I have written about it in more detail here.
The top company in the Price/NCAV chart above, Miller Industries (MLR), is also worth a look. Miller manufactures wreckers and is the leader in the sector. It is still led by its founder and his son. It is a long-term holding in my portfolio and the total return is on track to double in five years. It has also proven to be a good momentum play by buying the dips and selling the peaks.
The Price/NCAV Ratio can be a good tool in the toolbox to find value in both growth stocks and dividend growth stocks. It is valuable as a measure of intrinsic value despite price swings. It can highlight stocks that might be otherwise overlooked when used with other metrics.
Disclosure: I am/we are long MLR, JOUT, UFPI, AMNF, LMAT, GNTX, EXPD, ATRI, TPL, MKTX, CSVI, FAST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.