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Stock Screen: Widest Discount from Book Value – April 15, 2011
A company’s book value is derived by summing up all of its assets and subtracting all its liabilities. This is, arguably, what would be left after a total liquidation of the company. Some investors focus on book value when investing because it is an accounting look at what one is buying without the bias of investor sentiment. To this end, it is as close as one can get to a pure picture of what a company is worth, keeping in mind, of course, that accounting isn’t exactly a pure science.
Generally speaking, a stock trading near or below book value is of the most interest, since such a company can be bought for close to or, better yet, less than what it is “worth”. Clearly, investors looking at this largely value-oriented metric prefer buying a dollar of assets for less than a dollar.
It may seem odd to suggest that this is even possible, since efficient market theory dictates that arbitrage investors should quickly move in and bid up prices to the point where there is no longer a discount to book value. However, many of the companies that trade close to or below book value trade at such low valuation levels for a reason. Moreover, the total liquidation of a company isn’t a simple undertaking, so that quick money is far from assured. Thus, investors need to carefully research such companies and make sure that any risks are fully understood before investing.
To help value-oriented investors find companies that are trading near or below book value, a weekly screen listing such companies is included in the Index section of The Value Line Investment Survey . The screen shows the 100 companies with the widest discount to book value and includes Value Line’s proprietary Timeliness and Safety ranks, as well as recent price, book value per share, the percentage discount to book value, Beta, P/E, and dividend yield. Basically, that is everything one needs to start the research process.
Below are some of the more interesting investment candidates from the list. Subscribers can access the entire list by clicking here.
China-Biotics (CHBT) engages in the research, development, and marketing of probiotics dietary supplements in China. The company’s product portfolio contains live microbials made with proprietary technology. These products are sold over-the-counter under the ″Shining″ brand through large distributors to more than 1,000 pharmacies and 100 supermarkets in Shanghai, Jiangsu and Zhejiang. The company also supplies probiotics as bulk additives (about 40% of total sales) for the food industry.
Whereas the global stock markets have generally trended higher in recent months, China-Biotics stock fell sharply during the first quarter, due to financial results being lower than Wall Street’s expectations. We view the selloff as extreme, and anticipate a partial rebound at some point soon. It seems that analysts have set very high standards for China-Biotics; we have taken a more pragmatic stance. After all, recent results were far from shabby. Revenues are being bolstered by sales of yogurt, which have been historically strong in the second half of each year. Meanwhile, costs have been coming down as brick-and-mortar retail outlets have been shuttered, and Internet sales (particularly to Western markets) have increased. In addition, the company is ramping up the production of bulk products to meet rising demand from domestic dairy and animal feed markets. We also look for the company to continue to expand the presence of its retail probiotics products into the more affluent suburban regions of China. In sum, China-Biotics’ projected average annual sales and earnings growth appear sizable based on the strength we envision for core probiotic products. The one fly in the ointment is growing restrictive monetary and/or fiscal policies in China, which might dampen U.S. investor interest in Chinese companies.
Photronics (PLAB) operates in the semiconductor capital equipment industry. Specifically, it manufactures photomasks, which are quartz plates used to transfer circuit patterns onto semiconductor wafers. The company manufactures masks at nine facilities located in the United States, Europe, and Asia. The breakdown of 2010 revenue was as follows: Asia, 61%; North America, 29%; and Europe, 10%.
Photronics began the year with strong results. During the fiscal first quarter (ended January 30th), the company reported a 23% year-over-year increase in sales, to a quarterly record of nearly $121 million. This showing was particularly impressive given that the first quarter is typically the slowest, due to seasonality. The top line benefited from strong demand for both integrated circuit and flat-panel display photomasks. Increased high-end unit demand, usually having higher average selling prices, helped widen margins. This allowed share net to come in nearly a dime ahead of our estimate, at $0.20.
We continue to think that a majority of Photronics’ sales growth will come from Asia, as customers there increase their use of manufacturing foundries. Management has made significant investments over the past few quarters to expand its high-end market share, and we, therefore, expect demand for these products to strengthen this year. We note, however, that visibility remains limited, as the order backlog is typically only one to two weeks. We look for strong cash flow generation over the next few quarters. The company will likely use some of this cash to pay down debt. We also think it will invest heavily in capital spending in order to provide innovative, high-end photomasks that should drive earnings gains in the years to come. Business conditions are improving, and this should support growth over the intermediate term. We note that the stock retains our Lowest Safety rank, so conservative investors should tread carefully.
Imation (IMN) is a global leader in the development, manufacture, and supply of removable data storage products and consumer electronics. Traditional storage products, mainly optical and magnetic, represented 71% of 2010 sales. The remaining segments are emerging storage (14%) and electronics and accessories (15%). Sales by region in 2010 were as follows: the Americas, 49%; Asia-Pacific, 31%; Europe, 20%. The company acquired Memorex in 2006 and the TDK recording media business in 2007.
Imation’s sales and earnings will likely decline in 2011. Thanks to a surge of shipments in 2010’s final quarter for its latest offerings, which had relatively high markups, adjusted earnings in that period jumped to $0.22 a share, versus $0.08 in 2009. However, management expects the top and bottom lines to decline this year, mainly due to the likelihood of continued weakness in Imation’s traditional data storage products (magnetic tape and optical media). Also, the earnings surge in the December, 2010 period may well prove to be an anomaly.
The company’s pace of product launches has accelerated lately. Its research program has developed a 1.5 terabyte capacity cartridge, an award-winning line of secure removable hard disk systems, and scalable storage offerings for small- and medium-sized businesses. In order to augment its capabilities in data encryption and storage protection, the company recently acquired ENCRYPTX, a specialist in these fields. In the Electronics and Accessories segment, management plans to launch premium audio lines, while discontinuing a number of low-margined products.
Some fundamental challenges facing Imation will likely persist for a while. Notably, the trend toward open format magnetic tape is taking a toll on its sales and profits derived from proprietary products. Also, high-capacity offerings from Imation and its competitors have lowered the price per gigabyte of storage capacity and the volume of units shipped per annum. Too, low-margined flash products are hurting the overall market for CDs and DVDs. All told, we expect moderate annual earnings increases to mid-decade from this year’s estimated depressed level. However, that would leave share net in the 2014–2016 period far below the 2005/2006 peak levels.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.