5 Cheap Small Caps With 2% Plus Yields

Includes: IBA, ILG, KSW, MLR, XLS
by: Brian Harper, CFA

Following a strong run in the market and small-cap stocks in particular this year, it has become more challenging to find bargains. We believe there are still some diamonds in the rough, however. The following small caps are all at low P/E or P/FCF ratios, have strong or modestly leveraged balanced sheets, and all pay a dividend of at least 2%.

Small Cap Yield Values
Company Ticker Div Yield P/E (TTM)
Miller Industries MLR 3.0% 8.7x
Exelis Inc XLS 3.3% 6.1x
Industrias Bachoco IBA 2.3% 110.0x
KSW Inc KSW 3.9% 16.2x
Interval Leisure Group IILG 2.4% 23.9x

Miller Industries is a leading manufacturer of towing and salvage recovery vehicles. Miller finished 2011 with a net $4.41/shr in cash, is selling at 8.7x gross/6.4x net of cash, and shares yield 3%.

Exelis is a service oriented defense contractor which was recently spun-off from ITT industries. The stock has soared post-spin, from a low of $8.25 to the present $12.21, but continues to sell at 6.1x trailing and 6.5x 2012 estimated earnings. Exelis was left with the underfunded pension plan but modest debt, and there remains uncertainty with defense spending as a result of budget pressures, but the current price is more than discounting these risks.

Industrias Bachoco is the largest poultry processor in Mexico. IBA is cheap relative to U.S. peers such as Tyson, Sanderson Farms, and Pilgrims Pride, retains a sterling balance sheet, and has a dividend yield of 2.3% based on the current ADR Price of $20.86. IBA recently entered the U.S. via the purchase of O.K Industries, adding annual sales of $600 million, at what seems to be a very reasonable price (IBA expects to report a gain larger than the entire cost in the 1Q12 on the purchase). Earnings are volatile due to fluctuating chicken prices, and 2011 was weak, but we think normalized EPS is around $2.90/ADR.

KSW provides heating, ventilation and A/C services to large, high-rise buildings in New York City. KSW has been a long-time dog, but the company earns huge returns on capital, has about $3/shr in cash, and shares yield 3.9% based on the trailing payout (KSW has paid an annual dividend since 2008). Net of cash, shares trade hand for a mere 3.7x trailing earnings. KSW is tiny, with a market cap of only $25 million, and their CEO is essentially the company's rainmaker.

Interval Leisure operates the second largest timeshare exchange network in the country, with them and RCI splitting 99% market share. We wrote about Interval two years ago when shares were trading at $12.50. They recently spiked on strong earnings and the initiation of a $0.40/shr per annum dividend. However, we still think shares are worth closer to the low $20's, and the company has an upcoming catalyst with their high-cost (9.5%) debt becoming callable in August. Free cash flow is much higher than earnings as Interval is still amortizing intangibles related to a resort leasing company they purchased years ago. Price to free cash flow is about 11.3x.

The five above companies remain good values, and we own shares in all five.

Disclosure: I am long MLR, IBA, IILG, KSW, XLS.