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Stock Screen: High Returns Earned on Total Capital - October 26, 2011
Value Line calculates return on total capital, which appears in the Statistical Array section on every research report, by dividing net profits plus half of the current year’s long-term interest due by the sum of shareholder equity and long-term debt. The general idea of the measure is to see how much a company earns on the money it has been given by outside investors. Companies with high scores are, presumably, better wards of capital.
It is important to mention that comparisons between companies in the same industry will provide more insight than comparisons between companies in different industries. That’s partially because some industries will seldom show up on a screen of this nature, while others will have many candidates. Below are a few companies with the highest returns on total capital from our screen:
AFC Enterprises, Inc.
AFC Enterprises (AFCE) develops, operates, and franchises quick-service restaurants under the trade names Popeyes Chicken & Biscuits and Popeyes Louisiana Kitchen. Its restaurants have a unique "New Orleans" style menu that features spicy chicken, chicken tenders, fried shrimp, red beans and rice, and other regional items. As of December 26, 2010, the company had 1,542 franchised and 38 company-operated U.S. locations: all 397 non-U.S. sites are operated by franchisees.
During 2011, the company expects its franchise partners to open between 40-80 new sites on a net basis, up from 39 in 2010. What’s more, the pace of expansion ought to accelerate over the next several years, as AFC aims to improve both its planning capabilities (for new sites) and overall store-level economics. Notably, cost savings, via such things as supply-chain initiatives, should boost restaurant operating profits, thus providing a good incentive for franchisees to open additional locations.
AFC became a publicly-traded company in March 2001. Since then, it has given investors little to cheer about. In fact, at the recent quotation, AFC shares are down around 10% from their initial public offering price of $15. Still, a refocused management team, eager to capitalize on global growth opportunities and more rigorously enforced operating standards, appears to have a decent chance at delivering fairly reliable earnings growth going forward. Consequently, our projections indicate that the stock offers worthwhile, long-term capital appreciation potential, when compared to the Value Line median.
Teradata Corp. (TDC) is a global leader in enterprise data warehousing, including enterprise analytic technologies and services. Data warehousing products and services are comprised of software, hardware, and related business consulting and support services. As of December 31, 2010, revenues from the Americas accounted for 60.2% of the company’s total, followed by Europe, the Middle East, and Africa (22.8%, combined), and Asia Pacific & Japan (17%).
Business has been decent at the company these days. That’s attributable, in part, to the tremendous quantities of data being generated by corporate information systems, and the need to effectively organize this information in order to gain insight into business and markets trends. Acquisitions have also aided Teradata’s operating performance. One key purchase was Aprimo, a leader in Integrated Marketing Management and Marketing Resource Management software products and services.
The stock recently climbed to an all-time high of $62.70. That’s a reflection, no doubt, of the company’s decent earnings prospects. Even though the global economic outlook is uneven, it seems unlikely that corporate customers will significantly curtail spending on IT systems, given their strategic importance. Moreover, Teradata continues to broaden its reach by expanding the number of its sales territories, thus increasing penetration into targeted vertical markets (e.g., financial services and retail).
Graco, Inc. (GGG) designs, manufactures, and sells equipment, including specialized pumps, air & airless spray guns, regulators, meters, and valves, for moving and applying fluids and semisolid materials for the vehicular, construction, food, chemicals, and plastics industries. In 2010, the Industrial/Automotive unit accounted for 55% of total sales, followed by Contractor (35%) and Lubrication (10%).
Commercial prospects look brighter overseas than on the domestic front, right now. There are continued signs of weakness in the United States homebuilding and real estate arenas, and spending has been curtailed on remodels and restorations. Nevertheless, we expect sales from foreign sources to remain strong, driven by the Asia/Pacific region, where Graco enjoyed double-digit growth across all product lines last year. (For 2010, operations outside of the U.S. generated 54% of total sales.)
These shares have tumbled in value of late, and are now trading at an attractive price-to-earnings ratio. We think that stems partly from expectations of more difficult year-over-year, quarterly earnings comparisons during the second half of 2011. Indeed, the majority of expenses in connection with the acquisition of Illinois Tool Works’ finishing business will probably affect the income statement in the final quarter. Also, in this year’s second period, earnings were coming off of relatively low base numbers from the prior year, given that Graco’s new hand-held sprayers were not introduced to the European market until the third quarter of 2010. Still, Value Line analyst Steven Shnayder expects strong industrial demand will continue offsetting weakness in domestic residential and commercial construction markets. Therefore, venturesome investors may wish to give these shares a closer look.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.