Strong Debt-Free Balance Sheet, 40% EPS Growth and Steady Dividends Offer Excellent Upside on Low-Risk Stock
Value Line (NASDAQ: VALU) is a small-cap value play with a strong balance sheet, steady dividends and deep founding-family ownership (88%) which puts a floor on the stock and lowers volatility to some extent. At $15.12 (as of 9/19/2014), shares are up 25.7% year-to-date but are still down 72% from their pre-recession level of $54.48 in July 2007 and trade at a reasonable price-to-earnings ratio of 19.6x which is well below peer valuations and significantly below Q1 2015’s 40% EPS growth. The company’s 200-day Moving Average is rising which is a bullish indicator for shares.
Shares Are Attractive at Current Valuation, Well Below Pre-Recession Levels
Value Line shares do not reflect the significant potential of the company’s upcoming technology-enabled offerings, the vast treasure trove of securities data and independent analysis that the company offers, or the value of its assets management segment – making this a good time to initiate positions despite the 25% run-up in shares year-to-date by investors who recognized the value of this beaten down company late last year and bought in heavily.
Solid Profitability and Margin Metrics
Value Line has excellent profitability with EBITDA margin of 14.6% and net profit margin of 20.2%, well above its larger industry peers such as Global Sources (GSOL), Morningstar Inc. (MORN) or Thomson Reuters (TRI). The company has a market capitalization of $143.3 million (as of 9/19/2014) and trades at 4.26x book value and a rather attractive 13.6x cash flow.
Strong Dividend Orientation, High Payout Ratio, Modest 4% Yield
Value Line has paid dividends every quarter since December 1988 with high payout ratios as a percentage of earnings. It currently pays a quarterly dividend of $0.15 ($0.60 annualized) for a 4% yield that is attractive for long-term dividend and value investors. Over the past four quarters, the company paid out 80% of its earnings as dividends which reflects strong shareholder orientation, heavy founding-family share ownership and tight controls on how corporate resources are spent. Companies where founders own substantial stakes and have a dividend orientation typically reward dividend investors steadily, and Value Line falls in just that category.
Beta of 0.42 Good for Portfolio Diversification
Value Line shares carry a significantly lower Beta of 0.42 than their specialty publishing peers which makes Value Line shares attractive for portfolio diversification purposes. (Beta measures volatility, risk and correlation relative to the broad equity market with a beta of 1.0 carrying the same risk and correlation as the broad market.) The company’s significantly lower market cap than Global Sources ($233.6 million) or Morningstar ($3.06 billion) also makes it a potential acquisition target, possibly at a significant premium to current valuation.
Comprehensive Portfolio of Equity, Options and Funds’ Research Products, Services and Analytical Tools
Since its founding 83 years ago, Value Line has grown into a leading independent investment research provider and expanded into asset management. In 1982, Arnold Bernhard & Co. was re-organized as Value Line, Inc. which is still 87.97% owned by AB & Co.
Today, Value Line offers a full range of subscription products for individual investors (also known as retail investors) with online access to Value Line’s Research Center (for research, financial information and analytical tools), Investment Surveys (on over 1,700 analyst-covered stocks, 3,500 small, mid and large cap stocks, 1,800 small cap stocks and 600 widely-held large-cap stocks) and Premium Newsletters with monthly recommendations on high-quality dividend stocks, select stocks with the best upside and risk/reward ratio and aggressive special situation stocks.
In addition, Value Line Funds offers investment research, data and tools to help investors pick Exchange Traded Funds (ETFs) in the U.S. and Japan; comprehensive research, rankings and screens on thousands of mutual funds. Value Line Options covers options on all U.S. stocks, ETFs and indices, and Value Line Convertibles provides rankings and a unique approach to assessing over 600 convertible issues. Some of this data, along with older products, are also provided through print and microfiche.
Value Line fully owns Vanderbilt Advertising Agency, Inc., to serve the company and its subsidiary businesses, Compupower Corp. that provides subscription fulfillment services and Value Line Distribution Center which handles mailings and serves as disaster back-up and recovery site for Value Line.
On the asset management side, Value Line holds a substantial non-voting stake in EULAV Asset Management that manages the Value Line Family of Mutual Funds.
Value Line was founded by Arnold Bernhard in 1931, two years after the crash of 1929, to address woeful gaps in the availability, comprehensiveness and impartiality of investment research for individuals and institutions. Bernhard studied 20-year historical stock prices and earnings on 120 companies and put together objective metrics for unbiased indications on whether those 120 stocks were over-, fairly- or under-valued relative to their historical performance and future prospects without yielding to Wall Street noise or investor emotions.
Management Has Significant Industry Experience, High Effectiveness
Value Line is headed by Howard A. Brecher as Chairman and CEO. Brecher has been with the company for over 20 years and has a degrees in management and law from Harvard. Stephen R. Anastasio serves as Vice President and Treasurer and has been with Value Line for over 20 years in roles such as Corporate Controller, CFO and Treasurer, and is a Certified Public Accountant.
Management has a clear mandate to grow the business for the digital and mobile age, deliver stable cash flow and payout a substantial portion of earnings as dividends. Over the past 12 months, management has delivered 22.15% Return on Equity and 12.52% Return on Invested Capital.
Q1 2015 Financials – Operating Income Up 126%, Earnings per Share Up 40%
For its first quarter ended July 31, 2014, the company reported $8.3 million in revenue from investment periodicals and related publications and $0.8 million from copyright data fees for total revenue of $9.07 million, up just 1% from $8.95 million in revenues in the year-ago quarter. Management cut office administration expenses 36% to $1.28 million in Q1 2015 from $2 million in Q1 2014 and boosted operating income 126% to $1.06 million from $0.47 million in the year-ago quarter.
Revenue and profit interests from its EULAV Asset Management Trust (EAM Trust) totaled $2.02 million, up 14% annually, for total pre-tax income of $3.13 million, up 37% annually. As a result, net income climbed 41% to $2.04 million and earnings per share were up 40% to $0.21, well above the company’s 19.6x P/E ratio.
The company’s digital publications revenue increased 14% year-over-year with earned revenues from institutional digital publications up 15.4% and digital publication revenue from retail subscribers up 12.4% in the quarter. At quarter end, total digit product circulation was up 12.1% annually.
At quarter end, Value Line Mutual Funds managed $2.31 billion in total assets, an annual increase of 3.5%.
Value Line generated $1.35 million in net cash from operations, reversing a $0.8 million loss in the year-ago quarter.
Value Line ended the quarter with $6.9 million in cash and cash equivalents, $9.1 million in marketable securities, $58 million in investments in EAM Trust and total assets of $87.4 million.
Value Line has zero debt and $33.74 million in shareholders’ equity with 9,815,175 common shares outstanding (as of 7/31/2014), down from 9,863,388 a year-ago on steady buybacks.
Value Line has a steady business with good subscription revenue, a treasure trove of investment related research and data, a small but growing asset management business and a solid global brand. The company appears to have positioned itself well for digital content distribution and reported a 14% increase in revenue from digital publications. The company is committed to dividends and modest share buybacks and has a solid balance sheet with zero debt. Shares trade at a significant discount to EPS growth and are 72% below their pre-recession levels. Savvy investors have bid-up shares 25% over the past year but shares still offer excellent upside value and dividend income for long-term investors.