Thursday, June 11, 2009

Yanzhou Coal (YZC) - A Chinese Value Stock?

I have been watching with interest from the sidelines as alternative energy stocks have skyrocketed in recent months, partly wishing that I was riding the wave and partly quite content in the knowledge that there will be plenty of opportunity to make money in alternative energy in the future. My biggest concern at this point is that not all alternative energy stocks are created equally, a good number of them will fail, and ultimately which ones succeed may come down to politics. I don't yet feel confident enough to separate the wheat from the chaff, particularly as many alternative energy companies are not yet profitable, so I will continue to watch with interest and research companies that I feel stand out from the crowd.

So if I'm not yet investing in alternative energy, what am I focusing on? While I fully expect renewable and green technologies to play an increasing role in energy production in the future, I am still a firm believer that coal, oil and natural gas will remain the major sources of energy in the intermediate term. I also expect nuclear power to feature strongly, but that is a topic for another day.

You see, the problem with alternative energy, while highly desirable, is that it is expensive. In comparison, coal is cheap - very cheap. Yes, it is dirty, yes, the environmentalists don't like it, and yes, there is pressure to reduce its use in the US, but I don't feel that any of those issues are going to matter until alternative energy can begin to compete on price.

The other huge issue is that
China is the world's largest coal producer and consumer, and they are not going to stop burning coal any time soon. In fact, China plans to build stockpiles of the fuel in the eastern province of Shandong to ensure supplies and help stabilize prices. At this point China is self-sufficient in coal, but there may come a time soon when it is a net importer of coal.

If you are looking for a coal play that bets directly on China, then Yanzhou Coal (YZC) fits the bill. Yanzhou is one of China’s largest coal suppliers producing high-grade, low-sulfur coal, which burns cleaner and therefore fetches a premium price.
Yanzhou Coal (YZC) is principally engaged in underground coal mining, preparation and processing, sales, and railway transportation of coal. The company is organized into three operating divisions: coal mining, coal railway transportation and methanol and electricity power. The company operates six coal mines: Xinglongzhuang coal mine, Baodian coal mine, Nantun coal mine, Dongtan coal mine, Jining II coal mine (Jining II) and Jining III coal mine (Jining III), as well as a regional rail network that links these mines with the national rail network.

So Yanzhou Coal (YZC) is in a great position to benefit from China's growing demand for coal, and also from any additional infrastucture investment, but what are the fundamentals like? Despite the recent upward movement in the share price, I believe that Yanzhou Coal remains a value stock with plenty of potential upside.

The company has low debt, has shown excellent growth in recent years, and pays a 4.2% dividend. Yanzhou Coal (YZC) currently trades at a P/E of 7.4 and a price/book of 1.8 with a current ratio of 2.83. The company boasts a return on equity of 26.9% and a gross margin of 50%. The company currently trades at $14.85 and I would be looking for a 12-month price target of $25-27.

At the time of writing the author held shares in Yanzhou Coal (YZC).

Wednesday, June 10, 2009

CryoLife Inc. (CRY) - A Value Stock... But Not One For The Faint-Hearted

CryoLife, Inc. (CRY) is engaged in preserving and distributing human tissues for cardiac and vascular transplant applications and develops and commercializes medical devices. The human tissue distributed by the Company includes the CryoValve SG pulmonary human heart valve (CryoValve SG), processed using CryoLife's SynerGraft technology. The Company's medical devices include BioGlue Surgical Adhesive (BioGlue) and Hemostase, which the Company distributes for Medafor, Inc., as well as other medical devices. CryoLife distributes BioGlue, which is used in place of stitches, throughout the United States and in more than 70 other countries.

CryoLife is an interesting company that has been on my radar for a while now. The company has carved itself a nice niche in an almost recession proof sector and has been aggressively marketing its products. The market for BioGlue and tissue preservation services is only going to continue to grow as the population gets larger and older, and eventually the true value of the company will be recognized. My main concern is the wild rollercoaster ride that the stock price has been on over the years. That said, I do believe that the lawsuits are now behind them and that the company will continue to grow.

The company has been profitable since early 2007 and has been steadily increasing earnings and sales since then. CryoLife trades at a P/E of 5.0 and a price/book of 1.55 with a current ratio of 4.28. The company boasts a return on equity of 38.1% and a gross margin of 64.5% which is pretty impressive in the current economic climate.
There was significant insider selling last fall when the company was trading at over $12 a share, although CEO Steven Anderson still holds almost 7% of the company, which I take to be a positive sign.

CryoLife currently trades at $5.82 and I would be looking for a 12-month price target of $11-12.

At the time of writing the author did not hold shares in CryoLife Inc., (CRY).

Monday, June 8, 2009

SmartPros (SPRO) - Time To Go Back To Value School?

SmartPros (SPRO) provides learning and training solutions for professional markets, including accounting/finance, legal, engineering, securities and insurance, as well as information technology professionals. The company also provides corporate governance, ethics and compliance training for the general corporate market. It offers off-the-shelf courses and produce custom-designed programs with delivery methods suited to the specific needs of its clients. Its customers include professional firms and companies of all sizes. The company's e-marketing and e-commerce business sells ads on its website and develops newsletters and marketing programs for clients.

Depending on which numbers you choose to believe, unemployment currently sits somewhere between 9% and 14%. In these uncertain times I believe that companies such as SmartPros should do well as unemployment figures soar. Those of us lucky enough to be employed will most likely be looking for ways in which to become more valuable to our employers in order to retain our positions, and those of us who have suffered the loss of their job will inevitably be looking for ways in which to stand out from the crowd in the competition for the limited openings available. This is where SmartPros comes into its own. The company offers courses in the very skills that many people will be looking to add to their resumes.

The company reported excellent figures for 2008 and I expect a similar trend to be observed in 2009. As of December 31, 2008, the company had approximately $6.63 million in cash and cash equivalents, $5.6 million in deferred revenue, stockholders' equity of $12.1 million, and no debt. SmartPros trades at a P/E of 8.1 and a price/book of 1.17 with a current ratio of 1.36 and a gross margin of 57.9%. Also, the acquisition of Loscalzo last year appears to have been a smart one, leading to a number of cost cutting measures and an increase in ROIC.

In the company annual report Chairman and CEO, Allen Greene stated “We are proud to have finished the year strong and are looking to carry that momentum into 2009.” “We continue to show revenue growth year-over-year and our operating profits were at an all-time high. Further, we believe that operating profit and EBITDA numbers provide the best comparative narration because it removes the influence of interest rates and the tax benefit treatment.” Greene holds almost 5.6% of the company stock and is one of several insider holders. Also of note, real estate investor Zohar Ben-Dov announced a 10.5% stake in the company in March this year.

The company boasts a large course library and a large customer base, however, it is a competitive industry with a relatively low barrier to entry, meaning that the company has to continually strive to protect its niche. This being said, I believe that SmartPros represents good value at its current price of $3 a share and would be looking at a 12-month target price of around $5.

Disclosure: At the time of writing the author did not hold shares in SmartPros Ltd (SPRO).

Saturday, June 6, 2009

3 Microcap Value Stocks Worth Considering

If you are anything like me, you've probably spent many hours screening through list after list of stock tickers trying to unearth some as yet undiscovered companies that, just maybe, might turn out to be the next Google (GOOG), Microsoft (MSFT) or Walmart (WMT). This inevitably results in a collection of speculative smallcap and microcap stocks that you have never heard of before - after all, you're unlikely to find potential multibaggers among the highly researched megacap companies of the Dow Jones - companies that have already grown massively.

There are a number of things that must be considered when looking to invest in these smaller companies, not least of which is that there is often a lot less information available upon which to base your decisions, not to mention volatility and liquidity issues. So where is a good place to start? I personally like to begin my search by looking for value stocks with little or no debt that operate in niche markets. I also like to look for companies with good cash flow, high insider ownership, and a history of growth. It is a common misconception that most smaller companies will inevitably end up beginning run out of business by a larger one. In fact, many large companies are so slow moving that the smaller company eventually catches or even surpasses them! For instance, there was a time when the majority of people believed that Microsoft (MSFT) was invincible, until little Apple (AAPL) turned the tables and became a multi billion dollar enterprise.

So here are a three companies that I believe are worth considering further, along with a basic overview of each.

Image Sensing Systems, Inc. (ISNS)

Market Cap: $35.6M
The company develops and markets video image processing products for use in traffic applications, such as intersection control, highway, bridge and tunnel traffic management and traffic data collection. Its family of products, marketed as Autoscope and RTMS, provides end users with the tools needed to optimize traffic flow, enhance driver safety, regulate air quality and address security/surveillance concerns. Image Sensing Systems trades at a P/E of 8.6 and a price/book of 1.25 with a current ratio of 8.96. The company has been steadily increasing earnings and sales, and boasts a return on equity of 15.8%. The company has global exposure and wide potential with sales across North America as well as in Europe, Asia, and the Middle East. The stock currently trades at $8.92 and I would be looking for a 12-month price target of around $14-15.

RF Industries, Ltd. (RFIL)
Market Cap: $12.1M
The company is a provider of interconnect products and systems for radio frequency (RF) communications products and wireless digital transmission systems. Through six divisions the company supplies customers across a wide range of industries including aerospace, medicine, multi-media, and communications, as well as the military. RF Industries trades at a P/E of 9.4 and a price/book of 0.78 with a current ratio of 16.4. The company has demonstrated excellent profitability in the past, however has been affected by the economic downturn, resulting in reduced sales. As a result the company recently suspended its dividend payment in order to focus on product development and acquisitions. The company has a return on equity of 10.1% and the management appear to be making all the right moves to navigate through these difficult times. The stock currently trades at $3.95 and I would be looking for a 12-month price target of around $6-7.

Continucare Corporation (CNU)
Market Cap: $142.5M
Continucare is a provider of primary care physician services in Florida. The company through its network of 18 medical centers provides primary care medical services on an outpatient basis. It also provides practice management services to independent physician affiliates (IPAs) at 25 medical offices. The company trades at a P/E of 11.3 and a price/book of 1.34 with a current ratio of 4.8. The company has demonstrated good EPS and sales growth in recent years and has a return on equity of 12.8% with very high insider ownership. The stock currently trades at $2.40 and I would be looking for a 12-month price target of around $3.50.

Disclosure - At the time of writing the author did not hold shares in any of the companies mentioned in this article.

Thursday, June 4, 2009

Friedman Industries, Inc. (FRD)

Friedman Industries, Inc. (FRD) is a microcap value stock engaged in steel and pipe processing and distribution. The company divides its products into two main groups: coil and tubular products. Friedman Industries, Inc (FRD) sells coil products primarily to steel distributors and customers fabricating steel products, such as storage tanks, steel buildings, farm machinery and equipment, construction equipment or transportation equipment, located primarily in the midwestern, southwestern and southeastern sections of the United States. The company's principal customers for tubular products are steel and pipe distributors, piling contractors and U.S. Steel Tubular Products, Inc. (USS).

The company comes with a great set of fundamentals, trading at a P/E of 2.5 and a price/book of 0.7 with a current ratio of 3.9 and very little debt. The company has been steadily growing earnings and sales over the past few years, and has paid a dividend for the past 10 years (currently 3.5% yield).

Despite the current economic slow down, I am confident that a company of the strength of Friedman Industries will be among the survivors, particularly as the manufacturing and construction industries begin to pick up in the coming quarters.
Friedman Industries boasts a return on equity of close to 30% and a 5-year historical EPS growth rate of 31.7%. These are the kind of numbers that small cap value investors love to see. The stock price has already made a significant move upwards from its 52 week low of $3.82 in March, and has in fact just broken through its 200 day moving average, but I believe that plenty of upside still remains to be seen. I would be looking for a 12-month price target of around $12-13 as the economic outlook begins to improve.

Disclosure: At the time of writing the author held shares in Friedman Industries, Inc. (FRD).

Monday, June 1, 2009

Air T, Inc. (AIRT) - Microcap Value

Air T, Inc. (AIRT) is a microcap value stock which operates in two industry segments: providing overnight air cargo services to the air express delivery industry through its wholly owned subsidiaries, Mountain Air Cargo, Inc. (MAC) and CSA Air, Inc. (CSA), and aviation ground support and other specialized equipment products and services to passenger and cargo airlines, airports and the military, through its wholly owned subsidiary, Global Ground Support, LLC (GGS) and Global Aviation Services, LLC (GAS).

The company has the kind of fundamentals that Warren Buffett would love - if only he were able to trade a company this small. Air T, Inc. (AIRT) trades at a P/E of 4.4 and a price/book of 1.03 with a current ratio of 3.1 and very little debt. The company has been steadily growing earnings and sales over the past few years and pays a dividend of 3.7% which is pretty impressive for a company of its size. While there are a number of other microcap dividend payers, I have struggled to find one that I believe is quite as attractive as Air T, Inc. (AIRT). The company recently announced an annual dividend payment of $0.33 - an increase on last year's $0.30 figure despite the tough economic climate.

I find that significant insider ownership is often one of the most important factors to consider when looking to invest in small and microcap companies. Company Chairman, Walter Clark, owns around 6% of the company's stock giving me confidence that the company holds the interests of its shareholders as a high priority.

The company recently announced an order for 29 plane deicers, worth $11.5 million from the US Air Force as part of an ongoing multiyear contract with the US Air Force. The company also has strong ties with FedEx, operating a fleet of 95 planes as part of the FedEx distribution network.

While Air T, Inc. (AIRT) may not yet be a household name (it may never be), the most profitable investments are often the ones where you get in on the ground floor. I find it hard to believe that companies such as Wal-Mart (WMT) or Google (GOOG) will double or triple in size any time soon - they've had impressive runs already. However, a microcap value stock of the caliber of Air T, Inc. (AIRT) could quite easily double or triple over the next year or two.

Disclosure: At the time of writing the author held shares in Air T (AIRT).