Thursday, January 18, 2007

Stockpickr Spotlight Portfolio Review: Hidden Values Alert

As I continue to scan for the next best value investment for my portfolio, I regularly visit the site to view what the pro value investors are adding to their portfolios. On my last visit to Stockpickr, the site selected the (a value investment newsletter) as a spotlight portfolio. This portfolio is comprised of 10 companies with market caps less than $3 billion that have high return on equity, low debt and consistent earnings and revenue.

In this post, I will provide my completed value scorecard for each of the 10 stocks in the Hidden Values Alert portfolio and highlight the best and worst financial aspects of the equity.

In Summary, here are some of the major highlights of my research:

- 8 out of 10 demonstrate 5 years of positive revenue growth, with Carbo Ceramics (CRR) leading the group in 23.0% CAGR.
- 9 out of 10 demonstrate 5 years of positive net income growth, with Labor Ready (LRW) leading the group in 56.9% CAGR.
- 1 out of 10 passed the 5 years of positive free cash flow growth, with K-Swiss (KSWS) leading the group in 28.0% CAGR. Please note that KSWS did not pass the overall test because of the recent performance of negative FCF growth from 2005-2006 on a TTM basis.
- 0 out of 10 stocks are valued less than 1.5 times their book value.
- 8 out of 10 stocks paid a dividend in 2006.
- 9 out of 10 stocks have a total liabilities balance less than the equity portion of the business
- 0 out of 10 stocks pass the FCF and Earnings yield safety of margin test of 2 times the current 10 year Treasury note.

Here is a picture summarizing the pass/fail results, with the leader in the group boxed out.

1) Timberland – TBL

Company Description: The Timberland Company engages in the design, development, marketing, and distribution of footwear, and apparel and accessories products for men, women, and children. As of December 31, 2005, The Timberland Company operated 21 specialty stores and 57 factory outlet stores in the United States; and 117 specialty stores and shops, and 28 factory outlet stores in Europe and Asia. The company was incorporated in 1933 and is headquartered in Stratham, New Hampshire

Assessment: Out of the 10 stocks, TBL has the weakest scorecard, currently only passing 1 of the 8 sections. TBL has l low liabilities % to equity at 66%. The firm is experiencing some slowdown on a TTM basis, which is resulting in many of the failure marks.

2) MSC Industrial Direct Co. – MSM

Company Description: MSC Industrial Direct Co., Inc., together with its subsidiaries, engages in direct marketing of various industrial products in United States. It distributes a range of stock-keeping units that include cutting tools, measuring instruments, tooling components, fasteners, flat stock, raw materials, abrasives, and machinery hand and power tools; and janitorial, plumbing, material handling, power transmission, and electrical supplies; and other products. The company was founded in 1941 and is headquartered in Mellville, New York.

Assessment: Currently passing 50% of the value scorecard sections, with strong revenue and income growth leading the way. Free cash flow yield is currently at 4.2% in the light of a decline from the full year of 2005.

3) Graco – GGG

Company Description: Graco, Inc. engages in the design, manufacture, and marketing of systems and equipment to move, measure, control, dispense, and spray fluid materials for industrial and commercial applications. The company operates through three segments: Industrial/Automotive Equipment, Contractor Equipment, and Lubrication Equipment. The company sells its products directly to end users, as well as through retail stores, independent distributors, integrators, warehouse distributors, jobbers, manufacturer representatives, and original equipment manufacturers. It has operations in North America, South America, Europe, and Asia. Graco was founded in 1926 and is headquartered in Minneapolis, Minnesota.

Assessment: GGG is the leader of the group demonstrating passing grades on 5 of the 8 value scorecard sections, with income and free cash flow growing faster than sales. For these great marks, GGG provides the highest price/book valuation at 8.6 times.

4) Watsco – WSO

Company Description: Watsco, Inc., along with its subsidiaries, distributes air conditioning, heating, and refrigeration equipment, and related parts and supplies. It operates in two segments, Distribution and Staffing. The company was founded in 1945 and is headquartered in Coconut Grove, Florida

Assessment: Provides positive grades on 4 of the 8 value scorecard sections, with income growing faster than sales. WSO also provides the lowest price/book metrics and highest dividend yield of the 10 stock groups. The major concern I have for GGG is the steady decrease of free cash flow of the last 5 years….

5) Florida Rock Industries – FRK

Company Description: Florida Rock Industries, Inc., a construction materials company, together with its subsidiaries, produces construction aggregates, ready mixed concrete, and concrete block. It operates in three segments: Construction Aggregates, Concrete Products, and Cement and Calcium Products. Its principal markets are the southeastern and mid-Atlantic states in the United States. The company was incorporated in 1945 and is based in Jacksonville, Florida.

Assessment: Provides positive grades on 4 of the 8 value scorecard sections, with a strong argument that it should pass the FCF growth section. Similar to WSO, FRK grows their income faster than sales, showing margin improvement. FRK is also on the lower end of the price/book metrics of the group. No significant concerns with FRK; will complete a second round of diligence in the equity.

6) Carbo Ceramics - CRR

Company Description: CARBO Ceramics, Inc. engages in the production and supply of ceramic proppant for use in the hydraulic fracturing of natural gas and oil wells. It operates in two segments, Proppant, and Fracture and Reservoir Diagnostics. The company’s proppant products are marketed worldwide primarily through pumping service companies that perform hydraulic fracturing for oil and gas companies. CARBO Ceramics was founded in 1987 and is headquartered in Irving, Texas.

Assessment: Provides positive grades on 4 of the 8 value scorecard sections, with the highest 5-year revenue growth rate of the group. The negative free cash flow for the last 2 years is something that should be looked into more closely.

7) K-Swiss - KSWS

Company Description: K•Swiss, Inc. engages in the design, development, and marketing of athletic footwear for sport, fitness activities, and casual wear in the United States and internationally. The company offers its products under the brand names ‘K•Swiss’ and ‘Royal Elastics’. It also markets apparels and accessories, including skirts, shorts, tops, polo’s, dresses, and warm-ups for men and women, as well as T-shirts, caps, socks, and bags. The company sells its products directly and through independent sales representatives to specialty athletic footwear stores, pro shops, sporting good stores, and department stores, as well as through its Web site. K•Swiss, Inc. was founded in 1966 and is headquartered in Westlake Village, California.

Assessment: KSWS passes 3 of the 8 sections, with the highest 5 year free cash flow growth rate and the lowest liabilities to book value of the group. The equity just recently failed the sales and the FCF growth rate sections on a TTM basis, while still providing a better FCF yield than the 10-year T-note. I will be adding KSWS to my second round of due diligence list.

8) Labor Ready - LRW

Company Description: Labor Ready, Inc. and its wholly-owned subsidiaries provide temporary employees for lifting, hauling, cleaning, assembling, digging, painting, and other types of manual or unskilled work. As of December 30, 2005, it had put approximately 600,000 people to work. The company serves small and mid-sized businesses in the construction, transportation, warehousing, hospitality, landscaping, light manufacturing, retail, wholesale, facilities, and sanitation industries. Labor Ready operates in the United States, Puerto Rico, Canada, and the United Kingdom. The company was incorporated in 1985 and is headquartered in Tacoma, Washington.

Assessment: LRW provides one of the strongest value scorecards of the group. Even though it only passes 3 of the 8 sections, of the 5 sections that are negative grades, most of them are on the cusp. The best thing that I like about LRW is the FCF yield at 8.9%, the highest in the group… This is the section that I favor most. Needless to say, I am adding LRW to my second round of diligence list.

9) Forward Air - FWRD

Company Description: Forward Air Corporation and its subsidiaries provide surface transportation and related logistics services to the deferred air freight market in North America. Its shipment consists of a pallet-load of freight, including electronics, telecommunications equipment, machine parts, trade show exhibit materials, or medical equipment. The company also offers a range of logistics services, including truck brokerage; dedicated fleets; warehousing; customs brokerage; and shipment consolidation and handling. As of February 27, 2006, Forward Air operated through a network of 81 terminals located on or near airports in the United States and Canada. It operates regional hubs in Atlanta, Dallas/Ft. Worth, Kansas City, Los Angeles, New Orleans, Newburgh, Orlando, and San Francisco. The company offers its services to air freight forwarders, integrated air cargo carriers, and passenger and cargo airlines. Forward Air was founded in 1981 and is headquartered in Greeneville, Tennessee.

Assessment: Provides positive grades on 4 of the 8 value scorecard sections, with income growing faster than sales. FWRD is on the lower end of the group in the liabilities to book metric. FWRD is trading on the high end for the group in the price to book valuation metric.

10) JB Hunt Transport Services - JBHT

Company Description: J.B. Hunt Transport Services, Inc., through its subsidiaries, provides transportation services in North America. It transports forest and paper products, building materials, general merchandise, food and beverages, chemicals, and automotive parts. It operates in three segments: Full Truck-Load Dry-Van (JBT), Intermodal (JBI), and Dedicated Contract Services (DCS). The company was founded by Johnnie Bryan Hunt in 1961 and is headquartered in Lowell, Arkansas.

Assessment: Provides positive grades on 3 of the 8 value scorecard sections, with income growing faster than sales. Some concerning areas are the –84% drop in free cash flow from 2005 and the significant increase in liabilities to book value….

Disclosure: Author does not currently own any of the stocks mentioned in this post.

Sources: website website
Yahoo Finance website


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