Category Archives: Company Analysis

Friedman Industries (FRD)

deer

Key Statistics

Market Capitalization = $37.02 million

Current Assets = $69.29 million

Cash & Equivalents = $22.33 million

Total Liabilities = 12.68 million

Net Current Asset Value = $56.61 million

Operating Cash Flow = $3.47 million

Price/Tangible Book = 53%

Altman Z-Score = 4.66

Summary

Friedman is a steel company that has been around since 1965.

Their business is split up into two segments: coil products and tubular steel. Coil products account for 67% of revenue and tubular steel accounts for 33% of revenue.

Coiled steel is basically a form of sheet metal used in a wide variety of different industries. It can be used in the manufacture of automobiles, refrigerators, or roof gutters.

Tubular steel is used for a wide variety of applications. It can be used in the medical industry for stethoscopes or wheelchairs. Engines require tubular steel, which can be used in aircraft or automobiles. Steel tubing is also used in the manufacturing industry, to transport liquids throughout the process. It is also used heavily in the construction industry, for things like structural support or railings.

Friedman is a smaller player in an industry dominated by giants, but it has managed over the decades to continue to survive in a tough industry. Its plants are located throughout the Southern United States. The plants operate in Texas, Arkansas, and Alabama.

My Take

Friedman’s stock has been beaten up. It started to decline last year as a recession and reduced steel demand became more apparent. It hit a low of $3.72 during the depths of the COVID decline. I bought it yesterday at $4.9899. It has gone up significantly since the lows, but I still think it is relatively cheap. A return to the 52-week high would take the stock up to $7.01.

The stock trades below net current asset value, so I don’t expect it to be an outstanding business that is growing fast with high returns on invested capital.

With that said, in the universe of net-net’s (a world of reverse mergers and biotech science experiments), Friedman strikes me as a high quality net-net. In the last year, it has posted positive operating cash flow, so it is a viable business. The Altman Z-Score of 4.66 also shows a high degree of financial quality and limited bankruptcy risk. I’m confident based on the operating history and high level of financial quality that Friedman isn’t going to annihilate its current asset value, which can’t be said for many net-net’s.

The situation currently appears bleak for the steel industry. The customers for steel products are hitting hard times as a result of the recession. Construction and manufacturing activity are likely to slow down.

I think the hard times are already reflected in the stock price. At 53% of tangible book, this is near the lowest level that it has traded in the last 20 years. In the last five years, the stock usually trades in a range of 80%-100% of tangible book. When the steel industry was hot in the mid-2000s, Friedman traded at double tangible book value. I think it’s a reasonable assumption that this can return to 80%-100% range of tangible book, at which point I will sell.

If the economy returns to some semblance of normal, then construction and manufacturing activity will get back to normal. Coiled and tubular steel are essential for a number of uses that aren’t going away.

Meanwhile, steel plants are being shut down and steel production is down for the industry. This means that if demand returns back to normal, Friedman will be well positioned to take advantage of it.

If that doesn’t happen, then Friedman has the balance sheet and discipline to survive. It already trades at a price which indicates that there won’t be a recovery in the steel industry.

For those reasons, I think the risk/reward makes sense, so I purchased a position.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Village Super Market (VLGEA)

grocery

Key Statistics

Enterprise Value = $240 million

Operating Income = $20.8 million

EV/Operating Income = 11.52x

Price/Book = .99x

Earnings Yield = 5%

Price/Revenue = .25x

Debt/Equity = 33%

Summary

Village Super Market is a chain of grocery stores trading at book value and located primarily throughout New Jersey and with other locations in Pennsylvania, New York, and Maryland. The company has been operating since 1937.

They are a part of the chain where I buy most of groceries: Shop Rite. Peter Lynch advocated “buy what you know,” so I hope this works out for me.

The Shop Rite that I go to is owned by a different operator and not a part of Village, but Shop Rite is a well known grocery brand around New Jersey, Pennsylvania, Delaware, and Maryland.

Shop Rite is known throughout the region as having the best prices. I used to shop at one of their rivals and was able to reduce my grocery bill by 30% when I switched.

My Take

For the last few years, Village’s earnings and cash flow have been in decline. This is why the EV/EBIT multiple is higher than I typically pay and the earnings yield is lower.

However, the stock is cheap on a price/book basis in comparison to its history. It currently trades at book value. As recently as 2014, Village traded at 2x book value on a lower equity level. Back then, shareholder equity was around $250 million and it is $321 million today.

The decline in valuation has been during this period of declining operating income. It also experienced declines during the recent sell-off.

Why have earnings been in decline? I think this is due to the trend towards Americans eating out more. Recently, Americans spent more money eating out than they did buying groceries.

With the rise of COVID-19, this has now completely reversed and spending on groceries is surging. I suspect this is a trend that will continue. Americans will continue to purchase large orders of groceries to ensure that they have enough food if there is another lockdown.

I also think that Americans are likely to see the financial benefits of eating out less. During a time of recession and financial stress, they are going to gravitate more towards the grocery store than the restaurant.

Another factor that has been hurting Village is Costco. Personally, I used to exclusively shop at Shop Rite. In the last couple of years, I have bought more bulk items at Costco. I’ll buy things like bread and eggs at Shop Rite every week, and then make a monthly trip to Costco and load up on things like meat that I store in my freezer.

Lately, I stopped going to Costco completely. With the COVID-19 panic, Costco is so crowded that it isn’t worth the trouble. I’m willing to pay a little extra and just go to the grocery store and not have to deal with as insane of a crowd.

While I think the competition with Costco is likely to continue, I don’t think that they can replace the grocery store. For me, Costco is out of the way and is a bit more of an “event,” while going to my neighborhood grocery store is a quicker ordeal.

Additionally, I believe that COVID-19 is going to break the trend towards restaurant eating.  I don’t think that Americans are going to go full-throttle back into their old routine.

Meanwhile, I suspect that grocery stores are about to experience a significant boost in sales and earnings, which should justify a higher multiple. Here is an image from my Shop Rite a couple weeks ago:

aisle

It seems to me like this kind of sales volume should justify a better multiple of sales and book value.

Moreover, no matter how bad this crisis gets, grocery stores are going to remain open. They’re as essential as you can get.

In short, Village is a company whose business has been positively affected by COVID-19 and yet it still trades at a very low multiple of sales and book value.

Additionally, even if this thesis is incorrect, the company has a strong and liquid balance sheet. Debt/equity is only 30%. They have $75 million of cash on hand. The Z-score shows a low probability of bankruptcy at 4.36. The Beneish M-Score shows a low probability of earnings manipulation at -3.5. I also take comfort in the company’s long 83 year history of operation.

Random

This is a New Jersey stock, so it’s only appropriate that I post a New Jersey song from the Boss.

 

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

American Outdoor Brands (AOBC)

Key Statistics

Enterprise Value = $670 million

Operating Income = $32.3 million

EV/Operating Income = 20.74x

Price/Book = 1.06x

Earnings Yield = 3%

Price/Revenue = .77x

Debt/Equity = 53%

The Company

American Outdoor Brands is a firearms manufacturer. They sell handguns, long guns, handcuffs, suppressors, and other firearm-related products.

Brands include: Smith & Wesson, M&P, Performance Center, Thompson/Center Arms, and Gemtech brands.

My Take

AOBC is not cheap on an earnings yield or EV/EBIT basis. This is because earnings are at a cyclical trough. Gun sales have been very poor for the last few years, and gun manufacturers have been punished accordingly.

The Obama Presidency was very good for gun sales. Gun enthusiasts bought up guns like crazy because they were worried about Obama imposing new gun regulations. Of course, the regulations never happened. This created a bonanza of earnings, cash flow, and sales for the industry.

At the peak in 2016, AOBC traded at a price/book ratio of 6x. Price/sales was 2x.

Then, the Trump Presidency came along and gun enthusiasts were no longer scared of regulation. Gun sales slowed.

Meanwhile, in the face of slowing gun sales and the recent bear market, AOBC shares were crushed down to below book value. Recently, all stocks have been dumped regardless of their prospects. The stock has also been punished in recent years due to the ESG fad, in which ESG investors don’t want to have exposure to an ugly industry like firearms manufacturing.

Unlike most of the economy, the firearms market now has excellent prospects. Last month, there was a 41% increase in background checks. Due to the Coronavirus panic, firearms sales are surging. I believe they are going to surge beyond the extremes experienced during the Obama Presidency.

This suggests higher multiples for AOBC. I don’t see why the multiple can’t expand back up to a price/book of 6x from its current 1x multiple. It could also expand up to its 2x price/sales multiple, on likely higher sales. I think there is potentially a 200% upside to the stock from current levels. The market seems to be catching onto this quickly. The stock is already up 15% from my purchase price while the rest of the market is going down this week. I expect this to continue.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

RMR Group (RMR)

winter

Key Statistics

Enterprise Value = $634.49 million

Operating Income = $205.54 million

EV/Operating Income = 3.08x

Earnings Yield = 10%

Price/Revenue = 1.04x

Debt/Equity = 0%

Free Cash Flow/EV = 27%

The Company

RMR Group is a property management company. They manage properties for REIT’s and and other real estate companies. They have been operating since 1986 (under a different name – REIT Management & Research) and manage properties in 48 states throughout the continental US.

Four of RMR’s REIT clients are: Industrial Logistics Property Trust (ILPT), Office Properties Income Trust (OPI), Senior Housing Property Trust (SNH), and Service Properties Trust (SVC). ILPT manages industrial & logistics properties, SNH manages elder care facilities (a growth industry based on US demographic makeup), SVC manages hotels.

Other clients include Travel Centers of America, a company with $6 billion in revenue operating truck stops throughout the United States. Five Star Senior Living is another client which operates elder care facilities.

My Take

The nice thing about all of RMR’s clients is that they are unlikely to be disrupted. The elder population is growing in the United States and they are all going to need medical care and housing, no matter what happens to the US economy. Truck stops and industrial parks might decline with an economic downturn, but they aren’t going away. Office properties are probably the most prone to disruption with the expansion of remote work, but that’s not going away entirely.

Not only are RMR’s clients unlikely to be disrupted, but RMR has *20-year contracts* in place to manage them. I believe a 20 year contract can be categorized as a moat. The key base management fee that they earn is .5%, which is based on market cap plus the value of the real estate. On top of that, RMR earns an incentive fee which is tied to the 3-year stock performance of the companies that it services. The management fee is steady and isn’t going anywhere. Meanwhile, when the stocks of the underlying REITs outperform, RMR earns an incentive fee on top of that.

Quantitatively, this is as good as it gets and it checks all of my boxes. It’s selling at an EV multiple of 3x, a 27% free cash flow yield, and at annual sales. The operating cash flow is $198 million, which compares favorably to the enterprise value of $635 million.

They post high returns on capital. The return on equity is 28%, and that appears to be sustainable based on the consistency of the management fees.

The balance sheet is in impeccable shape. Out of the current $46 price, $22.20 is cash. They have zero long term debt. The Altman Z-Score is 6.4, which implies a zero chance of bankruptcy.

The base case is that RMR itself has 20-year contracts in place with their key clients and they will continue to earn the base management fee. The potential upside is that the stocks of the managed companies wind up outperforming. In this situation, RMR earns more incentive fees.

The stock is currently cheap due to concerns about the REITs that it manages. The REITs have a lot of debt. OPI has a debt/equity ratio of 164%, SNH is 127%, SVC is 180%, ILPT is 97%. A few of these companies lost money in the last year and the stocks underperformed. Leverage isn’t uncommon in the REIT industry and cash flows are fairly predictable, so I am not overly concerned.Meanwhile, much of RMR’s earnings are tied up in the performance of these stocks. When those stocks underperform, it weighs down RMR with it.

Something else that probably weighs down the stock is the control of a single individual, Adam Portnoy, who controls a majority of the company’s voting stock. Not only does Adam Portnoy have total control over the company, he also serves as managing director and CEO. Investors can look at this in two ways: you have an owner-operator committed to increasing the stock price as much as possible, or you have an owner-operator who has more power than shareholders. The concerns likely weigh on the stock.

RMR has only been trading since 2015, but it is at a discount to its history and its competitors. It is currently the cheapest it has ever been. As recently as 2018, the stock traded at 3.5x sales and it currently trades at 1x sales.

Overall, this looks to me like a compelling bargain with a predictable business. The potential upside far outweighs the downside, which I think is further limited by the company’s strong balance sheet.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Principal Financial Group (PFG)

iowa

Key Statistics

Enterprise Value = $13.1 billion

Operating Income = $1.725 billion

EV/Operating Income = 7.59x

Earnings Yield = 9%

Price/Revenue = .95x

Debt/Equity = 28%

Price/Book = 1.02x

The Company

Principal Financial Group is an Iowa based asset manager and insurance company. Their current AUM is over $700 million. They company has grown premiums and AUM (along with fee income) rapidly over the last decade, with revenue rising from $8 billion in 2009 to $14 billion today.

The company is global in scope and operates all over the world. The business is split up into four segments: (1) Retirement & income solutions, (2) Principal Global Investors, (3) Principal International, and (4) US Insurance (life insurance is a key focus).

The valuation is likely depressed over concerns about fee income, along with the general gloom around the financial industry as the market expects interest rates to decline and there are jitters about a recession which I wrote about here.

My Take

PFG currently has a dividend yield of 4.1% and the share count has declined by 2.67% in the last year.

PFG is cheap relative to its history and its peers. It currently trades slightly below sales, which is where it was around nadirs in the valuation such as when it was emerging from the financial crisis. It is also trading at book value for the first time since 2013. The 5-year average price/book ratio for the stock is 1.41 and the average price/sales ratio is 1.25.

Like the other financials that I own, my expectation is that the valuation gap will eventually close and while I wait for that to happen, I’ll earn a decent shareholder yield.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Prudential (PRU)

unionstation.PNG

Key Statistics

Enterprise Value = $55.73 billion

Operating Income = $6.51 billion

EV/Operating Income = 8.56x

Earnings Yield = 10%

Price/Revenue = .59x

Debt/Equity = 48%

Price/Book = .57x

The Company

Prudential is one of the largest insurance companies and asset managers in the world. They currently manage over $1.377 trillion in assets. Areas of focus include: life insurance, annuities, retirement-related products and services, mutual funds and investment management. These are all brutally competitive industries in terms of pricing, but Prudential is one of the biggest firms in the market and can effectively compete in these hostile waters.

Insurance is the company’s biggest source of revenue. Premiums represent 56% of total revenue. Investment income (such as interest income) is 25% of revenue. Asset management fees at 6.5% of all revenue. Net gains from investments represent 3% of all revenue.

The financial sector has been under pressure over the last year due to concerns about an emerging US recession and the Fed’s moves to bring down interest rates.

My Take

Naturally, with the financial industry under pressure and cheap valuations available, I am drawn to it.

I currently own a variety of insurance and financial companies that are currently trading like a financial crisis and recession have already happened. The memories are fresh from the last financial crisis, which is why investors have been so quick to react to the potential of another one happening soon. In particular, everyone remembers the way that seemingly “stable” insurance companies (like AIG) performed terribly during the crisis and risks were lurking inside the balance sheet that couldn’t be gleamed from reading a 10-k and doing my kind of armchair Saturday morning analysis. With that said, my investment in these companies is an implicit bet that a financial crisis like the last one won’t be a part of the next recession, whenever that might come.

What I like about the company: Prudential is a stable company and ROE is usually around 8%, which also matches the long-term CAGR of the stock of 8.5%. Buried in that 8.5% CAGR is a face-ripping 80% drawdown during the financial crisis. Obviously, my hope is that kind of drawdown won’t happen again if we have another recession. Recessions rarely repeat and I think the financial sector is in much better shape than it was going into the last crisis. Prudential has been reducing debt over the last decade, cutting the debt/equity ratio in half over the last 5 years. This implies that it is risk averse and avoiding the gun slinging of the 2000s.

The best part: Prudential has a juicy shareholder yield. The dividend yield is currently 4.33% and the total share count has been reduced by 3.36% over the last year.

The stock is currently absurdly cheap, with another crisis baked into it. Throughout the history of the stock, the company normally trades around book value and dips below that during times of crises. The fact that it currently trades at 57% of book value suggests to me that the worst case scenario for this company is already priced into the stock.

Prudential is one of the cheapest stocks in the S&P 500 and trades at a discount to its competitors and its history. The current P/E of 9.86 compares to an industry average of of 19.7. PRU currently trades at 57% of book value, and the 5-year average is 82%. The industry average is 120%. The stock also trades at 59% of revenue, compared to an average of 130% for the industry and a 5-year average of 70%.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

National General Holdings (NGHC)

beans

Key Statistics

Enterprise Value = $2.982 billion

Operating Income = $375 million

EV/Operating Income = 7.95x

Earnings Yield = 9%

Price/Revenue = .48x

Debt/Equity = 38%

The Company

National General Holdings is an insurance company. The company traces its origins back to a company called Integon, which was specialized in auto and life insurance. Integon was acquired by General Motor’s insurance arm in the ’90s. For a few years after GM’s demise, the company was held by a private equity firm. It was then spun out as an independent company in 2014.

Key insurance products are standard auto insurance, nonstandard auto insurance (such as insuring high risk drivers), homeowner’s insurance, RV insurance, and small business auto insurance. They operate throughout the country, with large footprints in a handful of states, such as North Carolina, California, New York, Florida, Texas, New Jersey, Virginia, Louisiana, Michigan and Alabama. Revenues have steadily grown over the last 10 years, from $675 million in 2011 to $4.6 billion today. This has been through a combination of organic growth and acquisitions.

As a relatively small player in the insurance market, they focus in niche insurance products. Key niches include insurance for high risk drivers who have difficulty finding policies with other carriers (which are balanced by higher premiums charged to these drivers) and RV insurance.

The stock has been under pressure for the last year due to concerns about the wildfires in California. About 15% of NGHC’s premium volume is generated from the state of California.

My Take

National General is in my wheelhouse. It’s a cheap insurance company with little debt, consistent profitability, and the price is under some temporary pressure. I invest in these kind of situations all the time and NGHC is no different. Right now, on the basis of book value and revenue, NGHC is the cheapest it has ever been in its history.

The nice thing about insurance companies is that the market almost always overreacts to recent bad news, such as NGHC’s experience with the California wildfires. The truth is that the best time to buy an insurance company is after a big loss rather than after a tranquil period.

National General Holdings trades at a discount to its competitors and its history. The current P/E of of 10.6 compares to an industry average of 19.7. The 5-year average for the company is 18.76. The price/revenue ratio of .48x compares to a 5-year average of .72x and an industry average of 1.32x. Currently, the stock is the cheapest in its history, including where it traded post-GFC. On an EV/EBIT basis the stock trades at 7.95x, which compares to a 5-year average of 13.53x.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Movado (MOV)

business.PNG

Key Statistics

Enterprise Value = $471.43 million

Operating Income = $55.59 million

EV/Operating Income = 8.48x

Earnings Yield = 13%

Price/Revenue = .62x

Debt/Equity = 28%

The Company

Movado is a luxury watchmaker. In addition to selling watches via a large number of brands to various retailers, they also operate 44 retail stores. They can chart their origins as far back to 1881 when the firm was called LAI Ditescheim & Freres SA in Switzerland. The company changed its name to Movado in 1905.

Movado’s signature watch is the mid-century “Museum Watch,” which is noteworthy for its minimalist design. It is a simple black watch with one dot representing the 12, a design which is often duplicated into other watch designs.

They sell at a wide variety of price points and multiple brands. They sell everything from luxury watches that sell for over $10,000, to affordable luxury watches (selling under brands such as Hugo Boss) at a $75-$500 levels, and mass market watches that sell for less than $75.

My Take

Watch making is a hated industry. As cell phones grew in popularity, watch use declined. Watches are declining in popularity as they are no longer a go-to means to assess time. It’s much easier to look at a phone to tell time. Mechanical watches are also being crowded out by Fitbits and Apple Watches.

Even with the industry in decline, the industry isn’t going away. In particular, I don’t think that luxury watches are going away any time soon. People don’t wear luxury watches like Movado to tell time. They wear them for reasons of fashion and that market isn’t going to disappear.

Movado is priced like it is going out of business, but I don’t think that will ever happen. At some point, the market will stabilize. A good parallel to this is the predictions that e-readers would eliminate print books, a trend which never really materialized.

The fact that the watch industry is not going away is reflected in the Movado’s operating performance. 2019’s sales were actually the best on record at $680 million. Cash flows remain healthy and the balance sheet is robust. This looks to me like a situation where Mr. Market’s sentiment doesn’t reflect the true underlying reality of the business.

Movado has a high degree of financial quality. The debt/equity ratio is only 24%. There is a significant amount of cash on hand, at $5 per share and 13.42% of assets. The Altman Z-Score of 3.1 implies a low probability of bankruptcy risk.

Movado trades at a discount to its competitors and its history. The current P/E of 7.87 compares to an industry average of 20.03. It currently trades at 6x cash flow. The price/sales ratio of .62 compares to an industry average of .93. As recently as mid-2018, the stock traded at 2x sales. The stock is so cheap that the current price/sales level is near the lows reached at the nadir of the financial crisis in 2009. Price/book is also at a significantly cheap level, currently at .85x.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Domtar (UFS)

paper

Key Statistics

Enterprise Value = $3.014 billion

Operating Income = $454 million

EV/Operating Income = 6.63x

Earnings Yield = 13%

Price/Revenue = .4x

Debt/Equity = 37%

The Company

Domtar is a paper company. They sell paper products, like copy paper. They also sell personal care paper-based products, like diapers and toilet paper. They are the largest manufacturer of freesheet paper in North America, operating 10 paper mills that produce 3 million tons of uncoated freesheet paper per year. 77% of their production is in the US and the rest occurs in Canada. They also produce 1.8 million tons of pulp per year, with production also divided between the US and Canada. Pulp is derived from separating fiber from wood, which is a raw material used to make a variety of paper products.

The 52-week high for Domtar is $53.89 and a return to these levels would represent a 54% increase in the stock price. The stock is under pressure for the typical small cap value reason this year: trade jitters. Domtar has most of their production operation in the United States and they sell overseas. 58% of their pulp revenue, for instance, is derived from foreign markets. This makes them sensitive to the worries about trade, tariffs, and Trump tweets. The strong US dollar has not helped the stock, either.

At current levels, it is cheap by every measure. EV/EBIT is 6.63x, price/sales is .4x, it is below book value, it is only at 108% of tangible book value, and it is trading at 3.8x cash flow.

My Take

I like boring stocks, and it doesn’t get much more boring than copy paper, tissues, and toilet paper.

This is a stable, mature, company that is not growing significantly, which is why the stock boasts a high dividend yield. For the last 10 years, revenue has floated around $5 billion to $5.8 billion. It has consistently made money for each of the last 10 years, with the exception of 2017, a year in which they lost $4.11 per share. Even though they lost money that year, it was not tied to the actual performance of the business. This loss was related to the change in the tax law that year and was a one time expense. This year, the trade war hasn’t significantly impacted the actual revenues, earnings, and cash flows of the company. The movement in the stock looks to me like an overreaction to the scary headlines.

At some point, this trade war is going to be resolved. My expectation is that once that happens, regardless of the actual outcome, stocks like Domtar will rally just because it’s over with. The market just needs a resolution. It doesn’t even have to be a good resolution. This might seem endless, but at some point, this will go away one way or another.

Domtar’s core, boring, business is not going anywhere or changing any time soon. Diaper use isn’t going to decline because of a trade war tweet. Diapers can’t be disrupted by some money losing startup backed by venture capital cash. In fact, adult diapers are likely a growth industry considering the fact that the senior population globally will continue to expand as life expectancy increases. Copy paper isn’t going anywhere, either. People have been talking about paperless offices (Captain Picard only used his iPad with the LCARS O/S) since I was a kid and paper doesn’t seem to go away. The persistence of the paper market is reflected in Domtar’s stability in earnings and cash flow.

Meanwhile, while I wait for the stock to snap back to a normal multiples, I will be paid a nice 5.22% dividend yield. Domtar’s strong free cash flow also suggests that this dividend can be sustained.

Like everyone else, I am worried about the probability of recession, so I considered Domtar’s performance during the last crisis before I purchased the stock. Domtar continued to earn money during the last recession, making a profit of $3.59 per share in 2009. The stock reacted more violently than the actual business to the recession, falling from $100 per share to $30. I don’t think this will happen again if we face another recession because Domtar is much cheaper today than it was back in 2007. Going into the last recession, Domtar traded at a much higher valuation. In 2007, it traded at 1.5x book value and today it trades at .84x book. Going into that crisis, Domtar was also much more leveraged with a debt/equity ratio that was over 100%. Today, debt/equity is only 37%.

Domtar has a high degree of financial quality. The Altman Z-Score of 2.34 implies that the company is not in distress. The Piotroski F-Score of 7 also exhibits a high degree of financial strength. The debt/equity ratio of 37% is also at a low and safe level. The Beneish M-Score of -2.68 implies that the company is not an earnings manipulator.

Domtar trades at a discount to its competitors and its history. The current P/E of 7.74 compares to a 5-year average of of 14 for the stock, which seems right for a mature company that isn’t expected to change much and pays a high dividend yield. An increase to this level would be an increase of 80% in the stock price. The average P/E for the industry is 16.45. The current EV/EBIT multiple of 6.63 compares to a 5-year average of 14.16 for the stock. On a price/sales basis, the current .40x level compares to an industry average of .63x and a 5-year average for Domtar of .50x.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Insight Enterprises (NSIT)

8675309

Key Statistics

Enterprise Value = $2.135 billion

Operating Income = $243 million

EV/Operating Income = 8.78x

Earnings Yield = 9%

Price/Revenue = .27x

Debt/Equity = 45%

The Company

Insight Enterprises is an Arizona-based tech company founded in 1988. They operate globally, but their focus is on North America, where 76% of their sales originate. They provide tech solutions to business clients that run the gamut: supply chain optimization, connecting workforces, cloud and data centers, and the vague “digital innovation.”

Insight provides tech solutions for businesses, so they don’t have to do all of the work themselves. A company can pay Insight Enterprises, and procure their hardware, software, set up a secure cloud, set up remote work for their employees to collaborate, etc. If you’re running a large, complex, organization – it can be extremely costly to figure out how to complete all of this from scratch. It’s far more efficient to hire an expert like Insight to do it all for you.

Supply chain optimization is a service they offer to businesses to deploy hardware and software for the client. The procure and configure hardware and software for companies. Connected workforce translates to helping companies operate on the cloud, encourage employees to work on multiple platforms. Insight also provides security for these solutions. Businesses come to Insight with tech problems, and Insight offers solutions. For their cloud solutions, they provide robust security services and infrastructure management.

Digital innovation is a custom tech consulting service. Clients can go to Insight with a unique problem and see if Insight can develop a tech solution. For example, Insight can help if you’re running a hospital and need a system to predict how many nurses you need on staff in different specializations and at different times of the day. They’ve helped railroads use drones to inspect trains faster and with less staffing. Additionally, they have developed automated drilling platforms for oil & gas companies. They’re a creative and innovative firm that can deliver real value to their clients, providing solutions that they likely wouldn’t be able to develop on their own.

To stay on the cutting edge, Insight acquires smaller firms that offer value to their clients. Insight has grown immensely through acquisitions. A few recent acquisitions include Cardinal Solutions in 2018, Datalink in 2017, Blue Metal architects in 2015. Recently, they announced their intention to buy PCM for $35 a share, or $581 million. PCM generates over $2 billion of sales, so it doesn’t look insane.

The stock suffered over the summer due to its place in the small-cap value universe and a slightly disappointing earnings report which showed some temporary rising costs related to the Cardinal acquisition.

My Take

Insight is a fast-growing company in a hot industry with a strong financial position that trades for very cheap multiples.

Their 10k is replete with buzzwords that usually make roll my eyes: Big data! Software as a Service! Internet of things! Cloud computing! Artificial intelligence!

Insight is at the cutting edge, and the company is a departure from my typically un-cool focus on dull and trashy industries. Don’t worry. I haven’t sold out: selling for 27% of sales and 9x cash flow, this is in the bargain bin of the stock market, despite Insight’s position in a fast-growing hot industry.

Insight Enterprises has a long and profitable history. The company has been consistently profitable over a long period. Insight even recorded positive earnings in 2009, in the depths of the global financial crisis.

Meanwhile, they have been able to grow sales and earnings throughout the economic expansion. EPS increased from 67 cents per share in 2009 to $4.55 in 2018. Sales growth has been similarly strong, growing from $4.1 billion in 2009 to $7.08 billion today.

Insight has a higher degree of financial quality with a Piotroski F-Score of 6, an Altman Z-Score of 3.48 (low bankruptcy risk), and a Beneish M-Score of -2.14 (not a probable earnings manipulator). The debt/equity ratio is current 45%, which is also at a safe level. The share count is down over the last year, so they are not diluting shareholders.

Insight trades at a discount to its competitors and its history. On a price/earnings basis, the current P/E of 11 compares to a 5-year average of 14.4. The average for the industry is 22. On a price/sales basis, the current level of .27x compares to an industry average of 1.45x.

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