July 27, 2007

Compu Credit

From the Fool:

Why? Mostly I'm enthralled by CompuCredit's 0.40 PEG ratio, which suggests the stock is trading on the dirt cheap. CAPS investor gameguru appears to agree:

On an earnings basis, I conservatively value the stock at $50, but if it makes the current earnings and growth estimates, that estimate rises to $60-$70. Insiders (including 5+% holders) own 63% of the stock [as do] major institutional holders [including] several value-oriented players, such as Second Curve Capital.

AXA

This Paris-based financial giant offers an array of "financial protection" products and services, including life, health, and property insurance and asset management for individuals and businesses. The company, which has a $91.1 billion market cap, also has an international segment that deals mostly with reinsurance, and is involved in banking activities in France and Belgium. AXA has about 52 million clients in 47 countries around the world, and operates primarily in the North American, Western European, and Asia Pacific markets.

AXA gets approval from the strategies that I base on the writings of Peter Lynch and James O'Shaughnessy. With a growth rate of 31.43 percent (based on the average of the three- and five-year earnings per share figures), my Lynch-based model considers AXA a "fast-grower, Lynch's favorite type of investment. One of the most important tests of a stock for Lynch is its P/E/Growth ratio, which identifies growth stocks still selling at a good price by dividing the stock's P/E ratio by its growth rate. P/E/Gs below 1.0 are acceptable to Lynch, with those under 0.5 the best case. At 0.39, AXA's P/E/G falls into that best-case category, indicating that this fast-grower is still a good buy.

For financial companies like AXA, one measure of financial strength Lynch uses is the equity/assets ratio. The model I base on his writings calls for companies to have equity/assets ratios of at least 5 percent; at 6 percent, AXA makes the grade.

AXA is also one of the few companies that pass one of my Lynch model's bonus criteria: a net cash/price ratio over 30 percent. Lynch likes to see companies that have a lot of net cash -- defined as cash and marketable securities minus long-term debt -- on hand, as a high value for the net cash/price ratio dramatically cuts down on the risk of the security. Stocks with a net cash/price ratio over 30 percent thus get a bonus pass, and AXA, at 30.86 percent, makes the grade.

My O'Shaughnessy-based value strategy, meanwhile, looks for large companies because they tend to exhibit solid and stable earnings. The model I base on O'Shaughnessy's writings thus calls for companies to have market caps of at least $1 billion, and, with that $91.1 billion cap, AXA easily passes this test.

O'Shaughnessy also compares companies to the market average in a number of ways when looking for value stocks. One such area is cash flow per share, so my O'Shaughnessy-based model targets companies whose cash flow per share is greater than the market mean. AXA's cash flow, $5.37 per share, more than triples the current market mean of $1.58, passing this test with flying colors.

Another reason this method likes AXA: its 3.27 percent dividend yield.

$21 Target on SCSS

Having come down off lofty trading highs just over a year ago, Select Comfort (SCSS) shares appear poised to make a comeback in the next six months, according to Zacks senior retail analyst Rob Plaza, CFA. Here's what his most recent report has to say:

“We remain positive on Select Comfort shares, due to its significant long-term growth potential. The company's long-term goals include annual sales growth of 15% and annual earnings growth of 20%. What's more, the stock is trading at 14.9 times our 2008 EPS [earnings per share] estimate, which is well below our estimate of the company's long-term earnings growth rate.

“As such, we view this as an attractive valuation. We recommend purchasing the shares on dips. We reiterate our Buy rating. Our target price is $21, which is 19x our 2008 EPS estimate.

“SCSS is a leading specialty mattress manufacturer and retailer. The company markets a line of adjustable-firmness mattresses featuring air-chamber technology, branded the Sleep Number bed, as well as foundations and sleep accessories. Select Comfort's products are sold through its more than 460 stores located nationwide, its national direct marketing operations, at selected furniture retailers, and at selectcomfort.com.”

July 18, 2007

Northgate Minerals

From the Fool:

With the fact that we'd have a six bagger if NXG hit the industry average P/E (which is above 30), I just like the upside. If they grow earnings by 15% annually for the next five years ... and are priced with an extremely reasonable P/E of 10 in five years, the price would be $11.28, close to a quadruple from today's prices. This company isn't going anywhere short-term with [a] strong balance sheet and strong margins, so I think it is well worth the risk for the long-term.

July 16, 2007

The Fool on Discovery Financial

In May 2006, MasterCard's (NYSE: MA) IPO was greeted with a lukewarm response from market pundits. Critics almost universally viewed the IPO as a way for the banks to distance themselves from antitrust and other litigation, particularly from Morgan Stanley's (NYSE: MS) Discover Card and American Express (NYSE: AXP).

Concerns were so overwhelming that the IPO price was dropped 10% to just $39 per share. Two days after the IPO, MasterCard shares traded at $46, but the sentiment was still negative. I liked the shares in the mid-$40s and recommended them to subscribers of Motley Fool Inside Value.

Fast-forward
More than a year later, MasterCard is now trading around $170 on the back of a phenomenal increase in profitability and the expectation that management can achieve its targeted earnings-per-share growth rate of 15% to 20%.

On July 2, Discover Financial Services (NYSE: DFS) opened at $28.55, but as often happens with spinoffs, it would appear that many shareholders are ditching their shares because they represent a much smaller holding than their Morgan Stanley position. The shares now trade down 5% (around $27), having been as low as $25 earlier in the week.

An opportunity?
Foolish colleague Emil Lee wrote earlier this week that Discover was a "solid buy." Emil's argument was sound, and I don't want to tread the same ground. Rather, because MasterCard has been our biggest gainer at Inside Value, I thought it would be worthwhile to examine Discover's recent offering in light of what MasterCard looked like last summer.

And so let's get one thing straight: Discover shares aren't likely to outdo MasterCard's. Discover Financial does not have the same leverage because of its much smaller market share, and its brand hardly registers outside North America.

In the first couple of years, spinoffs typically see increased expenses and capital expenditures while the company establishes itself and manages the business without interference from a corporate parent. On the plus side, the standalone company now must answer to its own shareholders, so we can expect capital allocation decisions that benefit shareholders rather than the corporate parent. The independent entity also has an easier time making alliances with other banks.

Discover is, by far, the smallest of the credit card companies, and it doesn't have the same financial clout as the Big Three. Nevertheless, even the smallest card will benefit from the increasing consumer trend away from cash toward electronic payments. In addition, legal rulings against Visa and MasterCard's restrictive practices have opened up the market for Discover, and it can expect a significant cash settlement from Visa and MasterCard when the legal issues are resolved.

The Foolish bottom line
I expect Discover Financial Services to gradually improve revenue growth from an anemic 5% over the past three years to around 7% to 8%. Profit margins should also improve as the company gets a hold of its expenses.

The upshot, then, is that I can see these shares being 15% to 25% undervalued -- not quite the MasterCard-sized opportunity of 2006, but not to be sniffed at, either.

July 13, 2007

Hawkins Chemical

From the Fool:

Stable dividend-paying stocks are usually associated with only the biggest and most unexciting companies. Hawkins -- a company that formulates, blends, and distributes specialty chemicals -- certainly qualifies as a boring business. But with a market cap of only $161 million, Hawkins is a consistent dividend payer that actually comes in a small package.

Over the last five years, Hawkins has generated steady operating cash flow and has even increased its top line at a compounded rate of 8.3%. That might not sound like much, but when your three business segments are water treatment, industrial chemical, and pharmaceutical chemical, I'd say any kind of growth is welcome. With an EV/EBITDA of 8.6 and a 2.80% yield, Hawkins might be worth a call on CAPS.

July 12, 2007

Casual Male

From the Fool:

Two stars? Sorry, I don't see it. Return on capital has been on the rise since 2005. Gross margin is expanding faster than America's collective waistline. And owner earnings topped $33.5 million in the last 12 months alone. Pretty impressive for a firm that commands just $439 million in market cap, wouldn't you say?

I would. And so would CAPS All-Star jtallenmd, who in February proclaimed Casual Male's intrinsic value to be "at least $24." I'd agree, except that he may be lowballing it. Assuming 17% dilution for each of the next five years and 22.5% cash flow growth over the same period, Casual Male is worth more than $32 a share, by my math.

One insider with a handle on numbers seems to agree. On Thursday, senior vice president and controller Sheri Knight opened a direct position in Casual Male by purchasing 1,000 shares on the open market.

So, who's right? Bears or bulls? Between the valuation and the insider buying, I'm inclined to side with the snorters. Look for Casual Male to make an appearance in my CAPS portfolio today.

July 6, 2007

IKAN

IKAN has been mentioned on the Fool as a growth stock idea. It is a Hidden Gems pick.