Value Line (VALU, $40.79, $410M mkt cap).
Key Investment Points:
1. Very profitable business model. Gross margins of roughly 90%, operating margin of 40%, and net margin of 28%.
2. Publishing division has lots of growth potential. The Value Line brand has tremendous brand equity. I believe the company could grow sales substantially by co-marketing its fundamental research with other companies' investor education courses, which are usually focused on technicals.
3. Mutual funds performing well. The company's two largest equity mutual funds (5-star rated VLEOX and 4-star rated VALSX) have outperformed the Nasdaq over the last 3 months.
4. Valuation attractive. The company as $11 in cash & investments per share and no debt. Excluding cash, VALU trades at only 12.5x earnings, using my $2.40 estimate for current EPS run rate. Compare to Morningstar (MORN), which doesn't have that much cash and trades at 30x C2007 EPS. On the mutual fund side, T Rowe Price (TROW) trades at 22x and Janus (JNS) trades at 30x on a 2007 basis. JNS and TROW have 10% of their mkt cap in cash.
5. Very low float. VALU has a 1.3M share float. The remaining 8.7M shares are closely held by the founding family.
6. Maybe a special dividend. The company did a special dividend of $17.50 per share in 2004 and perhaps they might do one again, although smaller.
7. I like the company's products. I use the regular Investment Survey and the Small and Mid-Cap editions for overviews of 3,500 stocks. Stocks are organized by industry, which helps me get up to speed quickly on a sector. I avoid stocks with low Safety ratings, which warn me about bad financials; and I use the online Investment Analyzer to do quantitative screens for stocks with improving fundamentals and decent valuation.
8. Stock has a $1.20 regular dividend, which was raised from $1.00 in Oct 2006.
Risks:
1. Publishing revs have been flat. Mgmt has focused on reducing costs over the past few years, and it's an open question whether they can drive the top line here.
2. Mutual fund AUM of $3.7 hasn't grown much over the years, either, although that could change if the funds perform well.
3. Low float makes it harder to enter and exit positions.
Target Price:
My target price is $60, or 20x EPS excluding cash of $11 per share. This target represents about 50% upside from here.
Margin of Safety:
I think a reasonable floor for the stock would be 10x EPS ex-cash, or $35. |
