Medtronic (MDT)A leader in the industry of medical equipment yet is trading at 1998 prices. Became interested after reading Vitaly Katsenelson’s latest article rebutting Barron’s. I was very close to buying a position this morning but had to wait to go through some finer details.
Typical of medical instrument companies, MDT has huge margins. Gross margin is over 80%, operating margin is still maintained at 30% and the net margin is just under 20% with the average net margin over 10 years being 19%.
Barron’s sees MDT’s debt as a problem, and to be honest, it has been rising. The TTM debt to equity is at 96% which means for every $1 of equity there is $1 of debt. However, FCF to total debt is about 26% TTM, FCF to short term debt is 135% and FCF to long term debt is 50%. In other words, MDT generates plenty of FCF to cover all of its debt without having to take any loans.
MDT is trading at a multiple of 10 but should really be trading at about 13-14 compared to its peers. This puts the estimated value in the range of $40-44. DCF also comes out to around $45-50. Historical consistency makes it easier to value and the Benjamin Graham formula gives a value of around $45 as well.
John B Sanfilippo & Son (JBSS)A company that came up in one of my value screens. JBSS is a commodity business selling nuts and a net margin of 1.2% last year reflects the competitiveness of the industry. What makes JBSS worth keeping on the watchlist is that the company has been focusing on reducing debt and driving profitability to the bottom line.
There was a period from 2006 to 2009 where short term debt had doubled but the company has been aggressively paying back both short term and long term debt to reduce interest expense and strengthening its balance sheet. This has helped the company go from negative owner earnings to positive territory again.
You can see the improvement in operations by following each criteria of the Piotroski score. The current TTM Piotroski F score stands at 8.
Valuation wise, JBSS isn’t exactly in value territory. With a 0% growth rate and 12% discount rate, the DCF based on an owner earnings of $16.7m comes out to be $12.
Food Technology Service (VIFL)Value Uncovered beat me in writing about VIFL and since VIFL is still a stock on my watchlist, I will direct you to the VIFL analysis.
Duckwall Alco Stores (DUCK)Duckwall Alco is a small company operating small retail stores in towns. The company has very low volume and fits the NCAV category of investments. I.e. its current assets are greater than its total liabilities. DUCK, being a store operator, expect a lot of its assets to be in inventory. The NCAVcomes out to be around $18 and the current price of just under $14 offers about a 25% margin of safety.
Although DUCK is a net net, it doesn’t have a consistent history of losses. Capex was higher than normal during 2009, but it was due to a growth strategy of new store openings. I still don’t expect much in the way of growth and it is likely that DUCK will stay in the NCAV category without much recognition or exposure. As much as I would like to apply a DCF valuation, the FCF numbers are inconsistent so it would be best to rely on valuation based on assets.
Sales is consistent which shows that if management can get costs down and operate the company smoothly, DUCK has a chance of breaking out of the NCAV region. The only problem is that most companies can’t do this.
DisclosureNo positions. Not a recommendation to buy or sell any stocks mentioned.