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Best of the Best 200 Small Companies: Part 2



November 14, 2009 – Comments (1) | RELATED TICKERS: IDCC , AVAV , HWKN

Forbes Magazine just had their special on the "200 Best Small Companies" in the November 2nd issue.  I figured this would be a great starting point to search for potential investments because of course some of these "Best Small Companies", will end up being tomorrows "Best Large Companies", so therefore some investment opportunities probably exist within this group.

After looking at all 200 of these companies, I’ve selected a group that I think are good candidates for being successful investments.  Below are the next 5 that I think are really worth taking a close look at.

IDCC (InterDigital Inc.)
InterDigital is a technology vendor to cell phone companies, along with other devices that use IEEE wireless communication, and license out the patents they have to these customers.  They have over 3,000 patents, with nearly 9,000 more in process.  This is a huge growth area as according to their last conference call, wireless data traffic is expected to grow ten-fold over the next 5 years (think youtube videos on cellphones).  They are working on developing solutions for the bandwidth crunch that is happening. 

This past quarter they grew revenues a full 37%, and earnings by 232%!  Since they are indeed highly profitable, you would think a high premium would have to be paid for this type of growth along with their vast portfolio of patents.  Fortunately this is not so.  This stock is trading at 19 times trailing earnings and just 7 times forward estimates!  Analyst have been bumping up their estimates over the past 90 days, and are predicting an average of 21% per annum growth for the next 5 years.  If they are even close with these estimates, this stock is not going to be trading at just 7 times those earnings.

Furthermore, this company is SOOO ridiculously cheap because on their $957 million market cap, they have $430 million in cash and virtually no debt!  Management has already proven they are shareholder friendly since in March they authorized a $100 million stock buyback and have purchased about a million shares already with this.

Listen to the conference call that happened on October 29th.  About 4/5ths the way through it gets funny, and then real serious.  The analyst's first words are "oh sh*it" as he thought he was disconnected from the call, then later... well, lets just say it's not the last time you'll hear the word "sh*it!" or "my God!") in the CC.  He makes some great points on how ridiculously cheap this company is and that management should be spending everything they can on repurchasing as much as this company as they can vs. earning a measly 0.5% to 1% on their cash holdings.

IEC (IEC Electronics Corp.
IEC does contract electronic manufacturing.  They have been growing revenues at a nice clip, which has been helped primarily by their expansion into aerospace and military products.  In 2005 these were less than 1% of their sales, but this has grown to over 50% of sales today.

Looking at the trailing PE of less than 4 does not really do any good because it appears the majority of those earnings are simply a result of tax credits.  We also can't look at analyst estimates for any guidance, simply because no analyst cover this company yet.  However, we can perhaps say this last quarters results were more normalized and what future income statements will look like.  On the top line their was growth of 45%, which translated into a $1.3 million operating income.  Lets assume that with the growth they are experiencing, they are able to do that for the next three quarters (their revenues have been very steady and growing, so I do not think this is an unreasonable assumption), well, then we have a company trading at 7.5 times their operating income.  The story line takes a dip with knowing they have $9 million in debt, but with having an EBIT of 16 times greater than the interest expense, perhaps this isn't really that bad after all.  If they can continue to grow revenues, this company may be a big winner as they have much higher gross margins, operating margins, and income growth than their competitors.

HWKN (Hawkins Inc.)

This Minneapolis based chemicals company has been in business since 1938, and has two segments of Industrial (65% of sales) and Water Treatment (35% of sales).  As you could predict, the Industrial segment was down, and off by 23% last quarter, hit by the recession, but the Water Treatment segment (apparently if you live in the Midwest you've drunk water treated by their chemicals) was stable as it declined by less than 5% in sales.

So basically you have a small, but stable, long term slow growth company, and it is trading at an attractive valuation of just 9 times trailing earnings and 10 times forward estimates.  They also have a cash hoard of $37 million built up, along with no debt, making the company a further bargain yet.  The stock pays out a 2.5% dividend, which is not in jeopardy at all considering it is a small fraction of their earnings.  A ten year chart is interesting to look at to see how slow and steady the stock has been up until this year.  Since it has had a large rally this year, I'm just going to keep it on my radar screen and purchase only if the stock pulls back in a bit, even though fundamentally it does still seem priced attractively.

NPK (National Presto Inc.)
This is a nice boring company that I believe is undervalued precisely because it is such a boring (yet cash cow) company.  They make small appliance items for the kitchen primarily.  You can check out their products at their website:  Next years estimates for revenues are roughly $525 million, up from just over $300 million in 2006, so it's not like it's a non-growth company, it's just not in a sexy industry like the next non pick is.  At just 12 times both trailing and forward earnings they can easily afford their measly $1 dividend (for a 13% payout ratio), not to mention they have $0 debt and $135 million in cash.

ERII (Energy Recovery Inc.)
This company builds mega-project reverse osmosis desalination facilities.  I think this company has a bright future as demand for clean water rises and more and more communities will need these in coming years, but I can not recommend buying it yet due to the high premium (over 5 times sales and 40 times earnings) on the stock.

AVAV (AeroVironment Inc.)
You know those Army and Air Force commercials where they are flying unmanned aircraft systems (UAS) though a computer screen?  Well, this is a company that is benefiting largely since they develop and produce these UAS's.  Revenues have grown from $174 million in 2007, to an expected $343 million in 2011.  I don't see why the value of these to the military would not continue for years and years since they save lives and provide a tactical edge.  While it looks expensive at 39 times trailing earnings it gets more reasonable if we look at 2011 estimates, which it is trading at 20 times those.  Analyst are predicting 23% growth per annum for the next five years, so indeed if that type of growth happens, the stock may be a value here.  And again, this is a company that truely is cheaper than it appears on a multiple basis due to the fact they have $141 million in cash (and growing), $0 debt, on a market cap of $605 million.  



1 Comments – Post Your Own

#1) On November 14, 2009 at 6:09 PM, JakilaTheHun (99.93) wrote:

Good list. 

My issue with using it as a guide for investing is that Forbes and other similar publications tend to select their "best businesses" according to what has been performing well over the past year or two.  A lot of the time, these businesses operates in cyclical industries, so even if they are well run, you could be buying at a time when earnings are at their peak, rather than at the trough.  

ERII and HWKN are both interesting to me, but I'm afraid there could be a cyclical effect with HWKN and ERII is still way too expensive post-IPO. 

If I see HWKN dip down under $15 or ERII below $4, I might consider them. 

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