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3 Small Cap Stocks to Watch: GMAN, EGOV, DORM

August 26, 2013 | About:
Just realized that the 2013 edition of the Forbes Best Small Companies is due out soon.

Since it has been so long since I last went through the companies on this list, here is a quick summary.

The methodology used by Forbes in coming up with the list is quite simple.

  • strong sales and earnings growthpublicly traded for at least a year
  • generates annual revenue between $5 million and $1 billion
  • stock price no lower than $5 a share
  • excluded financial institutions, REITs, utilities and limited partnerships
The stocks also have a ranking.

The rankings are based on earnings growth, sales growth and return on equity in the past 12 months and over five years; we dropped thinly traded names and those with fuzzy accounting or major legal troubles. We also factored in stock performance versus each company’s peer group during the last year as of Oct. 5.
Let’s get crunching into the current 2012 list.

Company financials and other metrics were taken from the OSV Stock Analyzer.

Gordmans Stores (GMAN)



Inside Gordmans Stores

In its simplest form, Gordmans Stores is like Ross Stores (ROST) for the Midwest. They have around 90 stores in 19 states focused on the everyday value strategy for apparel, accessories, shoes and home decor.

Gordmans had their IPO in 2010 so it’s a short history to work with.

Unfortunately, there is no Gordmans in Seattle so I don’t have a first hand view of the shopping experience, but I do visit Marshalls, Ross and Tuesday Morning to go value shopping. I’m a value guy after all. Why pay full price when you can buy the same thing for half price.

The problem is that discounters like these compete on price. To compete on price, you need scale, and having 90 stores isn’t what you call scale in the discount space. Not when you have to compete with Ross and TJ Maxx.

Here are some numbers for you to nibble on and decide whether it’s worth looking into.

Highlights

  • Small steady increase in revenue since IPO. 7.35% CAGR from 2010 to 2013
  • Only $2m total intangibles out of $215m in total assets
  • Insignificant amount of debt. Only $0.1m.
  • Shareholders equity increased each year
  • ROIC at 20% but falling fast
  • Overall a healthy balance sheet
Lowlights

  • Horrible same store sales of 10.9% in the latest quarter
  • Q1 of 2014 decreased 1.9% despite an increase in the number of stores by 10%
  • Drop in margins from the comparable quarter by 2.5%. Falling margins in a company that competes on price is a no no.
  • 72% CAGR increase in capital expenditures from 2011 to 2013
  • Negative FCF and Owner Earnings
  • CROIC is negative
  • Gross Profitability to Assets has dropped significantly showing that the assets are not being used productively
  • Days Inventory Outstanding has gone from 73 days in 2011 to 93 days TTM
Unless you like turnaround retail stocks, there isn’t much to look at, so let’s move on to the next one.

NIC Inc (EGOV)



NIC Builds websites for Government

Impossible to tell from the name, but NIC builds internet portals for the government.

Ever renewed your license online? NIC built those sites so that you can do it yourself. No more waiting an hour or two to renew your license. Streamlining basic processes online reduces costs, improves efficiency and makes life easier for you and me.

It is also a clear shift towards modern technology by the government to improve their aging IT systems.

Other examples of portals and transactions NIC provides are

  • renewing vehicle registration
  • paying for speeding and parking tickets
  • getting a fishing permit
  • filing and paying taxes
  • incorporating a new business
  • using the state government to perform searches
The tantalizing part of NIC is their business model. They have to win the contract to build the portals like any other government project, but the deal is that NIC pays for everything themselves up front. The government does not pay them to build the portals.

NIC then gets paid by collecting a fee from the usage of the portals. Every time you renew your license or pay for something on the state website, a percentage of that goes to NIC for the duration of their contract. Keep in mind that the state websites suck. No technical design, no latest web coding. NIC just has to keep it plain and simple.

The clear advantage with working with each state on something like this is that there is no competitor. Once you get in and build their system, it is highly likely that they will switch companies. Contracts are not long term, but NIC hasn’t lost a bid or renewal yet. Definitely owns a switching cost moat.

NIC doesn’t cover all 50 states so there is still room to grow. Just depends on whether NIC can land the contracts for the bigger states.

Highlights

  • 15.3% CAGR of revenue from 2003 to 2012. The first two quarters of 2013 is already impressive and looks to be another strong year.
  • Huge gross margins hit from 47% in 2006 to 38.4% in 2010. Slowly coming back. 42.2% gross margins TTM.
  • Fantastic balance sheet.
  • Low capital intensive business and amazingly profitable
  • ROE of mid 30% range
  • ROIC at 140%
  • CROIC of 170%
Lowlights

  • Valuation. You need to pay for growth.
  • PE adjusted for cash comes out to 38.6, EV/EBITDA is 21.4, P/FCF is 33
  • Relies on government budget to get paid. Some states are unable to pay NIC due to unapproved budget.
  • Capex has doubled since 2011
Definitely worth a buy at the right price, but right now, it’s roughly at fair value using some generous growth numbers. See image below.

NIC: 9% discount rate with 22% growth.

Dorman Products (DORM)



A supplier of auto replacement parts and heavy duty truck replacement parts and provides “exclusive” parts to OEM’s. Customers can only get these parts from the OEM or pull it out from cars in salvage yards.

The types of exclusive parts include intake manifolds, exhaust manifolds, oil cooler lines, window regulators, radiator fan assemblies, power steering pulleys, and harmonic balancers.

The majority of products are still sold in auto parts stores like AutoZone, Advance Auto and O’Reilly. They have over 133k SKU’s so that is a whole lot of products they design and manufacture.

Continued unemployment and the recession was a big boom to Dorman’s but with US car sales surgingsimilar to the highs of 2007, you have to wonder whether Dorman’s will be negatively affected.

Highlights

  • Increased revenue every year since 2004
  • Margins are still expanding and at all time highs at 39%
  • All debt paid off since 2009
  • 11.4% CAGR growth in shareholders equity from 2004 to 2012
  • Overall a clean set of financial statements
  • Strong returns. ROE, ROIC at 20% and CROIC at 30% and growing.
Lowlights

  • Valuation has more than doubled since 2011 no longer placing it in official value territory


Valuation Ratios for Dorman Products

  • Macro trends and current growth expectations place Dorman’s on an uncertain line
  • AutoZone, Advance Auto Parts, O’Reilly Auto Parts and Genuine Parts each account for more than 10% of sales. The four customers make up 57% of sales.
  • Periodically buys back shares but it has been at the high valuations
There is nothing glaringly bad with Dorman at the moment. It’s just one of those borderline investments with economics making up a big variable in how the investment could turn out.

Any of these get you interested?

Disclosure

About the author:

Jae Jun
Founder of Old School Value (http://www.oldschoolvalue.com) dedicated to offering the most complete and detailed stock valuation and analysis spreadsheet. Investing made easy by importing 10 years of financials and 5 quarterly statements directly to excel for your analysis needs. Save time, make smarter decisions and make more money.

Visit Jae Jun's Website


Rating: 3.5/5 (6 votes)

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