Van Den Berg has a relatively large portfolio of 71 stocks, which had quarter-over-quarter turnover of just 5 percent, and is weighted 35% in industrials. In the fourth quarter, he added to his positions in 11 companies. The top three, which he increased by triple-digit figures, are all small-cap industrial goods & services companies: Powell Industries Inc. (POWL), Perceptron Inc. (PRCP) and Innovative Solutions and Support Inc. (ISSC).
Powell Industries (POWL)
Founded in 1947 and headquartered in Houston, Texas, Powell Industries Inc. develops, designs, manufactures and services custom engineered-to-order equipment and systems for the management and control of electrical energy and other critical processes. It services large-scale industrial, energy, municipal and transportation customers worldwide. Powell Industries Inc. has a market cap of $395.3 million.
Powell Industries’ largest competitors are ABB, Eaton Corporation, GE, Schneider Electric and Siemens. Its flexibility in designing custom-made solutions on a timely basis at a competitive price give it its competitive edge.
Van Den Berg has had a rather small holding of this company since the second quarter of 2010, when he bought 7,440 shares at about $31 per share. He sold 1,140 shares in the fourth quarter of 2010 when the price reached $33, and sold another 580 shares in the first quarter of 2011 when the price reached $38. He then bought more as the price went down, most recently, in the fourth quarter of 2011, making his largest purchase of 129,860 at an average price of $32, which increased his holding 605%. His total holding currently equals 151,325 shares.
The fourth quarter offered an attractive buying opportunity when the company had to restate its second and third-quarter earnings on November 8 due to accounting errors origination from its Canadian operations. The company at the same time announced a non-cash impairment of the remaining intangible assets related to the acquisition of Powell Canada, totaling $7.2 million, or $0.61 per diluted share, as a result of continued losses at the acquired company that caused them to reduce their projections for revenues and cash flows going forward. Powell Canada is integral to major planned projects in the western Canadian oil sands.
The stock declined 15.6% from the day of the announcement to its 52-week low on November 25; since then, it has been trending back up.
Fourth-quarter and full-year results, issued December 6, helped buoy the share price. Revenues for the fourth quarter increased to $171.2 million compared to $133.8 million for the fourth quarter of 2010; revenues for fiscal 2011 were $562.4 million compared to $550.7 million in fiscal 2010. The company had a net loss of $2.7 million for fiscal year 2011, due in large part to the non-cash impairment charge and a non-recurring separation charge. Sans the charges, earnings would have been $6.1 million, or $0.52 per diluted share. For full-year fiscal 2012, the company projects revenues will range between $625 million and $675 million, and earnings to range between $1.25 and $1.50 per diluted share.
Powell Industries has a P/E ratio of 51.7 and P/S ratio of 0.7.
Perceptron Inc. (PRCP)
Perceptron Inc. makes laser-based technology and applications, such as handheld inspection scopes, dimensional gauging, robot guidance, gap & flush, wheel alignment, robotic scanning and portable scanning. It focuses on metrology, the science of weights and measures, and non-contact inspection, the ability to accurately inspect a part without abrasive paints or attachments, and in which it is a world leader. Perceptron has a market cap of $41 million and celebrated its 30-year anniversary in October 2011.
Van Den Berg originally bought 50,019 shares of this micro-cap company on the third quarter 2011 at about $6 per share. In the fourth quarter, he increased his stake 249%, buying 124,540 shares of the company at about $5 per share. Its share price closed at $5 on Thursday.
On November 30, Perceptron outlined its new growth strategy, which it initiated earlier that year, with the aim to drive revenue growth and improve profitability. “The Company is seeking to grow through a combination of organic growth while evaluating acquiring a synergistic technology- oriented business in a complementary non-automotive market segment. The Company intends to engage an investment banker as part of the process to assist it in identifying and evaluating appropriate potential acquisition targets and to provide appropriate feedback on our strategic direction and associated plans,” the company said in a statement.
Crucial to this strategy is the company’s industry breakthrough technology, Helix™, which is entering its first phase of commercial release in all three automotive regions. Helix enables manufacturers to perform their most challenging 3D metrology tasks easily and precisely.
Perceptron’s revenue was declining from 2008 to 2010, but increased from $52.1 million in 2010 to $59.3 million in 2011. Earnings also increased from a net loss of $0.8 million in 2010 to a net gain of $1.82 million in 2011; free cash flow increased from a loss of $2.4 million to a gain of $5.4 million in the same years. Cash exceeds liabilities, with about $22 million in cash and $14.9 million in total liabilities, including zero long-term liabilities and debt.
GuruFocus contributor Barel Karsan comments on the company’s strong cash position: “Speaking of the cash position, there's maybe a little too much of it on the balance sheet. It has been sitting there for about six years, not really earning a whole lot for shareholders in the interim. This is likely part of the reason the company trades at a discount. A dividend is likely out of the question, as insiders hold a lot of options that wouldn't see the light of day if a meaningful cash distribution were to take place. There are a whopping 1.1 million options outstanding against a share count of just 8.5 million, though some options are out of the money.”
Perceptron has a P/E ratio of 53.8 and P/S ratio of 0.7.
Innovative Solutions and Support Inc. (ISSC)
Innovative Solutions and Support Inc. creates sophisticated, cost-effective solutions for the commercial air transport, military and business aviation markets, using the latest technologies from the PC and telecommunications industries. Its clients range from the US Air Force to Air Canada. It was founded in 1988 and web public in 2000.
The more this stock’s price has decreased, the more Van Den Berg has purchased. He bought about 10,695 shares at about $5.50 per share in the second quarter 2011; 17,850 shares at about $5 per share in the third quarter 2011; and increased his stake by 154%, buying 43,945 shares at about $4.20 per share in the fourth quarter of 2011. The stock closed at $3.80 on Thursday, and is down 80% over the last five years.
ISSC’s revenue has increased at an annual rate per share of 10% over the last five years, but declined at an annual rate of 1.6% over the last 10 years; free cash flow has been positive since 2008, with no negative quarters in the last year. In fiscal year 2011, the company expended 5.1% more on R&D than the previous year in order to win several new contracts. The new customers, along with retrofit upgrades for Eclipse E550 aircraft helped boost sales 1.9% to $25.7 million. The impaired economic environment will actually help its business, it believes, as consumers will theoretically be more likely to retrofit products into old aircraft rather than invest in new aircraft.
ISSC has a P/E ratio of 81.6 and P/S ratio of 2.6.
See Arnold Van Den Berg's portfolio here.