Aflac (AFL)

peking-duck-2144957_960_720

Key Statistics

Enterprise Value = $33.806 billion

Operating Income = $4.586 billion

EV/Operating Income = 7.37x

Earnings Yield = 8%

Price/Revenue = 1.56x

Debt/Equity = 24%

The Company

Aflac is an insurance company based in Georgia with a wide presence in the United States and Japan. Aflac underwrites a range of insurance products such as: life, cancer, vision and dental insurance.

Sentiment

Aflac is not a hated stock. In the last year, the stock is up almost 25% and it participated in the S&P’s rally.  Despite this, the valuation multiples are still low and it is one of the cheapest stocks in the S&P 500 universe.

My Take

Aflac is certainly not the typical kind of company that I buy. There aren’t any glaring problems. I am usually on the hunt for deeply depressed and despised bargain stocks. Aflac is still a bargain, but it’s not something that the market hates. In the current environment, screaming bargains are not easily found.

I’m interested in Aflac from a relative valuation standpoint. Aflac currently trades at a P/E of 12.72. Compare this to the P/E multiples of other insurance companies: Progressive (23.43), Allstate (14.46), Travelers (15.53). Aflac could easily rise to a P/E multiple of 15-20 in the next year.

Aflac is also posting better returns than other insurance companies. Aflac’s return on equity is 13.93%. Compare this to other insurance firms: Progressive (13.52%), Allstate (9.49%), Travelers (12.78%). Aflac is also achieving this ROE result with very little leverage, with a debt/equity ratio of only 24%.

Aflac won’t offer exciting returns (it doesn’t have the potential for massive appreciation like Francesca’s, Big 5, or Foot Locker), but I think it is a safe place to deploy some of my funds in a manner that should outperform the S&P 500 over the next year. It also pays a high dividend yield of 2% (well, high for the S&P 500 universe). In addition to the 2% dividend, they are also buying back shares at a high rate. The common share count has been reduced by 3.47% in the last year.  In the last 4 years, they have bought back 14.19% of the common stock.

The enterprise multiple of 7.37 also makes it one of the cheapest stocks in the S&P 500. Some might object to my use of enterprise multiple and price/revenue in my valuation, but I think it makes sense for insurance companies. Insurance companies are really a product of their premiums (revenues), so I think it makes perfect sense to evaluate them based on an enterprise multiple. The balance sheet aspect of enterprise values is also particularly important for insurance companies, as debt relative to cash and assets is a good rough measure of the risks that the insurance company is taking.

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.

Dick’s Sporting Goods (DKS)

camping-2116401_960_720

Key Statistics

Enterprise Value = $3.505 billion

Operating Income = $461.74 million

EV/Operating Income = 7.59x

Earnings Yield = 9%

Price/Revenue = .69x

Debt/Equity = 28%

Debt/EBITDA = .71x

The Company

Dick’s Sporting Goods is a large sporting goods retailer. They operate 797 stores in the continental United States. In addition to the primary Dick’s stores, they also own Field and Stream and Golf Galaxy.

Sentiment

The stock is currently despised by the market, down 47.9% in the last year. Dick’s is undergoing the same pressures that are affecting all retail players. In the last year, same-store sales have declined and margins have been under pressure.

My Take

Dick’s Sporting Goods is currently priced for oblivion. Usually, when you see a company this cheap, there should be absolutely terrible news emerging from the stock.

In the case of Dick’s, the news hasn’t even been that bad when compared to the reaction in the market. The bad news has been pretty tame: in the last quarter, the company made 35 cents a share compared to 44 cents a year ago. This hardly seems like a case for Armageddon. Earnings were down because margins are under pressure.

While they have many physical retail locations, they also have a decent e-commerce platform. 12% of their sales occur online. In fact, e-commerce sales increased by 16% in the most recent quarter, helping increase their total sales from a year ago.

A nice and growing e-commerce platform, increasing sales, not a mall anchor, not totally concentrated in apparel. It looks to me like Dick’s Sporting Goods is actually one of the better companies in the retail sector and it is priced like it is one of the worst.

The company has very low debt levels in comparison to its assets and earnings and is steadily producing free cash flow, even outside of the holiday season. Most importantly, they are returning capital to shareholders. Common shares have declined by 5.7% in the last year and the stock currently boasts a 2.29% dividend yield. In the last five years, common shares have declined by 13%.

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.

Tredegar (TG)

Tredegar Corp (TG)

Key Statistics

Enterprise Value = $787.53 million

Operating Income = $42.47 million

EV/Operating Income = 18x

Price/Revenue = .7x

Earnings Yield = 9%

Debt/Equity = 47%

Debt/EBITDA = 2.21x

The Company

Tredegar is a manufacturer of polyethylene plastic films, polyester films, and aluminum extrusions. Aluminum extrusions are used in the construction and automotive sectors, so they benefit directly when the economy is expanding and are highly cyclical.  The plastic films are used mainly for hygiene products like diapers and feminine products.

Sentiment

The market is largely indifferent to this company.  Since the early 2000s, the stock has been stuck in a trading range between $13 and peaking around $25-$30. The price is currently at $18.90 and is down 21.25% YTD. Revenues and operating income have been in decline since 2013, which have contributed to the downward pressure in the stock price.

My take

One of the main strengths of the company is that it is has a large insider ownership, currently at 22%. This creates strong incentives to steady the course of the company.  On the negative side, the aluminum extrusion business is prone to the cyclicality of the US economy. In other words, a recession would seriously hurt this company.  Also on the negative side, the business of plastic films is also highly dependent on purchases from Procter & Gamble, who decided a year ago to diversify their supplier base and this hurt Tredegar’s sales.  Hopefully, the company will find new sources of sales and P&G won’t cut anymore.

On an EV/EBIT basis, the stock looks expensive, but it still has an attractive earnings yield and is cheap on a price/sales basis.  Much of the high EV/EBIT valuation is due to the fact that operating income has been diminished by the loss of revenue to Procter & Gamble and the fact that the company has a low cash stockpile. With that said, the overall debt/equity and debt/EBITDA ratios are relatively low.

I’m encouraged that the company is making efforts to cut costs by moving more domestic manufacturing to its Lake Zurich, IL facility.  I also believe the aluminum extrusion business will continue to expand, as a recession appears to be unlikely in the upcoming year.  Possible catalysts that could move the stock higher include: (1) the cost-cutting measures that have been depressing earnings start paying off, or (2) more customers are found outside of Procter & Gamble.  The high level of insider ownership implies to me that management will likely push hard for measures to turn the firm around.

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.

Interdigital (IDCC)

cellular-tower-2172041_960_720

Interdigital (IDCC)

Key Statistics

Enterprise Value = $2.007 billion

Operating Income = $365.34 million

EV/Operating Income = 5.49x

Price/Revenue = 4.54x

Earnings Yield = 9%

Debt/Equity = 34%

Debt/EBITDA = .68x

The Company

Interdigital develops technology patents (they currently have over 20,000 of them), primarily for the wireless industry. They make their money by licensing this technology to other companies. They license tech used for all of the big wireless companies, including Apple and Samsung. IDCC also derives revenue from lawsuits when other firms violate those patents.

Sentiment

Over the long term, IDCC has performed well. Wireless is a global growth industry and they own some of the critical technology that makes it possible. In the last 10 years, the stock is up 268%, beating the S&P’s 79% return by a wide margin. However, the stock is extremely volatile and prone to big swings in price. In the last year, the stock is down 8.96%. The relatively bad stock performance despite this being in a growth industry are due to earnings volatility, which can be driven by swings in the outcome of litigation.

My Take

IDCC is ignored by the market because of its size and earnings volatility compared to tech giants. The patents generate a significant amount of free cash flow, giving the stock a free cash flow yield of 10.49%. The ample free cash flow enables IDCC to remain a player without having to accrue significant debt levels.

On an absolute basis, the stock is cheap, but it’s also cheap on a relative basis. If IDCC were an S&P 500 component, it would probably trade at a significantly higher valuation.  A similar company like Qualcomm, who also develops wireless technology and leases patents, trades at a P/E multiple of 38.85. On “quality” metrics, IDCC is actually posting better returns on assets than Qualcomm. IDCC’s gross profit/assets are 21.78%, compared to Qualcomm’s 19%.

My only explanation for the discrepancy in price and quality is due to IDCC’s smaller market capitalization and choppy earnings results. If IDCC were an S&P 500 component, I think it would be valued a lot differently by the market, probably at a P/E of 30x or 40x.

IDCC is also not resting on its laurels. They continue to aggressively spend on research & development of new patent technology, averaging around $60-$70 million a year (19% of its operating income). They have close relationships with the wireless device manufacturers, so it is unlikely that competitors will enter their space and compete.

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.

MSG Networks (MSGN)

sharp-1844964_960_720

Key Statistics

Enterprise Value = $2.607 billion

Operating Income = $314.7 million

EV/Operating Income = 8.28x

Earnings Yield = 11%

Price/Revenue = 2.20x

Debt/Assets = 157%

Debt/EBITDA = 3.98x

The Company

MSG Networks is a product of a spin-off from Madison Square Gardens which occurred in 2015. The company represents the cable division, broadcasting events that occur in Madison Square Gardens. Cable networks pay MSGN fees for their content. The content includes NY sports teas like the Rangers, Knicks, Islanders, Devils. The stock is controlled by the Dolan family.

Sentiment

Sentiment against the cable industry and MSGN are negative. Everyone is worried about cord cutters. As cord-cutting catches on, content delivered on cable TV will become less valuable. As it becomes less valuable, cable channels will receive less revenue for the content that they distribute. When MSGN was spun off, it was also saddled with a massive amount of debt from the parent company, which is a risk.

My Take

While the market is worried about cord cutting, MSGN has a robust business that is throwing off generous amounts of free cash flow. They have been using the free cash flow to pay off debt that they were saddled with in the spin-off, thus improving their enterprise multiple valuation. They also announced a massive share buyback program recently for $150 million. That represents 10% of the existing market capitalization.

Even if cord cutting is a problem, I find it difficult to imagine a scenario where people don’t watch New York sports. Even if cord cutting catches on, it seems unlikely that MSGN’s properties won’t be valuable.

The debt is a problem. I usually avoid leverage whenever possible, but it is difficult to find spin-offs that aren’t significantly leveraged. Leverage, unfortunately, goes with the territory. When a parent unloads a smaller spin-off, they frequently use it as an opportunity to unload their debt onto the smaller firm. This is a major reason that spin-offs are neglected by the market as a whole.

Even with the debt, MSGN should continue to throw off cash flow that will service it. They are also taking the debt seriously and paying it down, thereby improving their enterprise valuation.

The cable industry is also in a state of consolidation. Disney recently purchased a significant portion of Fox. Starz was also bought out last year. MSGN is an attractive buyout candidate at its current valuation. In fact, selling the company may have been one of the reasons this was spun off in the first place: to isolate the cable entity for a potential acquirer.

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.

Big Five Sporting Goods (BGFV)

the-ball-488717_960_720

Key Statistics

Enterprise Value = $204.78 million

Operating Income = $36.44 million

EV/Operating Income = 5.59x

Earnings Yield = 14%

Price/Revenue = .15x

Debt/Equity = 25%

Debt/EBITDA = .91x

The Company

Big 5 Sporting Goods is a sporting goods retailer. They operate primarily on the West coast. In addition to their physical stores, they also have an electronic presence. The original location was built in California by Robert Miller. It started in 1955 selling World War II surplus items. They have grown to 432 locations and the typical store is roughly 11,000 square feet.  Their focus is on limiting prices. They purchase brand-name merchandise but acquire inventory via over-stock and close-outs, ensuring they can obtain the inventory at the cheapest prices available.

Sentiment

The market utterly despises this stock. Year to date it is down 57.64%. The stock now trades below book value of $9.48 per share and boasts an absurdly high dividend yield of 8.16%. The stock price is now down near lows experienced during the Great Recession.

My Take

Big 5 is the kind of stock I love: its an absurdly cheap stock in which investors appear to have thrown the baby out with the bathwater. In the most recent quarter, revenue fell 3.2% and operating income fell 25%. Angels and ministers of grace defend us!

Big 5 isn’t producing impressive results, but it’s not a collapse either, which is how it is currently priced. The current Amazon-driven retailpocalypse is making investors throw away small retailers like Big 5 with abandon.

I don’t normally chase dividends, but the stock pays a healthy dividend of 8.16%, which should far surpass what the S&P 500 will deliver long-term. Free cash flow ($27.56 MM over the last twelve months) is robust enough to support the dividend. If Big 5 can deliver on a decent holiday season, I hope I can get a return through multiple appreciation. A movement in the stock from the current 7.35 P/E to a still-depressed 10 would be a 36% return. The 8% dividend yield isn’t something I typically chase, but it is nice to be paid while I wait.

The small size is also attractive. In the ‘90s, the company was taken private and was bought out by management. At such an absurd valuation, I don’t see why the same thing couldn’t happen again if the market continues to look at the stock with such intense hatred.

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.

Francesca’s Holding Corp (FRAN)

blur-1850082_960_720

Francesca’s Holdings Corp (FRAN)

Key Statistics

Enterprise Value = $214.47 million

Operating Income = $43.18 million

EV/Operating Income = 4.96x

Earnings Yield = 11%

Price/Revenue = .48x

Debt/Equity = 0%

Debt/EBITDA = 0

The Company

Francesca’s is a Houston-based boutique retailer selling clothing, jewelry, and gifts for women.  You will typically find them in the kind of strip malls appealing to an upper-middle-class clientele (the one near me is in a strip mall with a Whole Foods and a Banana Republic). As a guy who buys my jeans at Wal-Mart, checking out the store was a bit off the beaten path for me.

Sentiment

Sentiment towards Francesca’s is in the realm of extreme hatred. Like Foot Locker and Gamestop, Francesca’s is getting hammered by the “Amazon will destroy physical retail narrative”.  It has also seen declines in same-store sales, which the market has reacted with zombie apocalypse level panic. As a small cap retailer, the ride down has been particularly brutal.  The stock is down 62% year to date and the hatred towards this stock is high.  The news has been moderately bad out of Francesca’s, but not bad enough to justify a 62% decline in the stock and the current valuation.

My take

Francesca’s is a stock at an attractive valuation with zero financial debt that is buying back shares.

55% of their locations are not in malls, they’re in strip malls.  Usually, these are high-end strip malls that have other attractions besides retail outlets.  The one close to me in Concord, Pennsylvania is in an active retail strip that includes other upper-middle-class destinations like Whole Foods.  This helps drive impulse spending without requiring a trip to the mall.

A major advantage that this company has is that they lease many of their locations and they have clauses in their leases that allow them to shut down stores if sales don’t hit targets.  This means that if an Amazon-driven “retailpocalypse” is real, they can quickly cut off the bleeding by shutting down unprofitable locations and won’t be stuck paying rent on money-losing stores.  They can refocus their efforts on their best and most profitable locations.

Francesca’s is also a location that will get a lot of discretionary spending this holiday season.  With the U-6 unemployment rate hitting lows not seen since 1998, real disposable income hitting all-time highs, and debt payments as a percent of disposable income remaining below 10% — I think the holiday season will likely be better than the doomed forecast reflected in the stock price.

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.

Trades

Continuing with the rebalance. I hope to have my 2018 portfolio set up by the end of next week.

I executed the below trades this morning:

Buy 21 shares of CTB @ $34.75

Buy 405 shares of BGFV @ $7.48

Buy 465 shares of FRAN @ $6.64

Sell 37 shares of VLO @ $86.78

Sell 150 shares of AEO @ $17.38

Sell 40 shares of DDS @ $57.58

Sell 22 shares of FL @ $44.72 (reducing the position back down to $3,000. The position grew by 1/3 since I bought it in September)

Sell 81 shares of CATO @ $15.18

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.

Hawaiian Holdings, Inc. (HA)

contrails-1210064_960_720

Hawaiian Holdings (HA)

Enterprise Value = $2.008 billion

Operating Income = $513.76 million

EV/Operating Income = 3.91x

Earnings Yield = 9%

Price/Revenue = .82x

Debt/Equity = 60%

Debt/EBITDA = .81x

The Company

Hawaiian Holdings is an airline with a focus on . . . Hawaii. Airlines are an out of favor industry as discussed in my Alaska Airlines post. Hawaiian has a niche focus on air travel between the Hawaiian Islands and the United States/Australia/New Zealand/Asia. They also offer flights within the Hawaiian Islands.

Sentiment

Hawaiian Airline’s growth was celebrated by Wall Street from 2013 to 2016 when the stock advanced from $5.45 a share to a peak of $60 at the end of 2016. Since the peak, the stock has fallen apart and declined by 28%. The stock has been under pressure since Southwest announced that they going to compete and send flights to the Hawaiian Islands. The market is concerned that Southwest will eat into Hawaiian’s market share while also adding more price competition.

My take

With a $2 billion enterprise value and $513 million in operating income, Hawaiian Holdings is the smallest of American airlines. This is an extremely attractive feature. The airline industry is currently in a state of consolidation, as evidenced by Alaska’s purchase of Virgin Airlines. With Hawaiian’s small size and niche focus, this makes it an attractive candidate to be bought out by a bigger airline.

I don’t normally focus on growth, but Hawaiian has been growing at an attractive clip for a few years now. Top line revenues have increased by 13% since 2013 and operating income has increased by 68% over the same period.

On an EV/EBIT basis, Hawaiian is one of the cheapest stocks in the entire market. Even if it isn’t bought out, the value proposition is compelling.

With a debt/equity ratio of 60%, Hawaiian also has little financial debt. This is true for many of the players in the airline industry, which is a welcome change from the history of the industry.

The competition against Southwest is a major concern, but Hawaiian never had a monopoly on flights to Hawaii from the United States. Competition isn’t anything new for the airline. At an enterprise multiple of 3.91, I also have an adequate margin of safety if competition does become brutal.

Like Alaska Airlines, this position also complements my international indexes that would benefit from higher oil prices. If oil were to decline, airlines should benefit.

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.

I am a value investor. My outlook is inspired by the ideas of Benjamin Graham. This site is a real time chronicle of my portfolio and an outlet to share my ideas. I hope you enjoy.