Charles and Colvard (CTHR, Financial) manufactures, markets and distributes moissanite jewels and finished jewelry internationally.
It began over 120 years ago. Nobel Prize-winning chemist Dr. Henri Moissan discovered moissanite (silicon carbide) in a meteorite crater. Dr. Moissan and other researchers searched for a way that science could reproduce this rare mineral.
Advance a century, and the vision and innovation of Charles and Colvard (CTHR, Financial) is fulfilled. Moissanite's hardness rivals any mineral on earth, and its refractive properties exceed diamonds. A new gemstone and Charles and Colvard creates a product free of environmental and ethical issues. It continues to disrupt the traditional fine jewelry.
My thesis is not only its obvious deep value based on liquid assets -- NCAV = .71 versus the stock price of 96 cents -- but improvements in all the metrics that will drive a higher ROE and its stock price. ROE is driven by Productivity, Profitability and Capital Structure. See tables below that support improved capital structure, productivity improvements (turnover ratios) and future profitability from higher sales and improved gross margins. Recent profits have been impacted by a major marketing shift to consumer marketing rather than distributors. Their website has been redesigned for consumers coupled with advertising dollars.
The stock is cheap based on many value metrics. A simple review of liquid asset values supports a cheap-stock thesis. Cash per share = 45 cents, inventory = 47 cents, NCAV = .79, NCV = .20, Current Ratio = 5.07, Quick Ratio = 2.81, Market Cap = $20.17 million and enterprise value = $10.49 million.
The stock is trading at historical and relative low valuations. Its F-score of 7 tied for the highest over the past 13 years.
The F-score is useful to measure if the company is moving in the right strategic direction. Using the F-score provides a snapshot of the present financial drivers that can help predict future performance and a higher intrinsic value. The F-score helps measure improvements in productivity, profitability and capital structure. So moving these components will drive a higher ROE or ROTC and intrinsic value. The company's F-score is 8 if the shares outstanding are reduced and not reported flat year over year.
Clean and improving capital structure. The share count is stable and non-current liabilities dropped from 2014 to the most recent quarter.
Note the 90% drop in enterprise value and 89% in market cap from 2013 to the most recent quarter.
Revenue per share improved 36% from 2014 to the trailing-12 months. The stock price dropped over that same period from $1.84 per share to 94 cents, or 49%.The stock price was $5.05 for the fiscal year ending 2013. Further note the improvement in productivity as measured by asset turnover, cash conversion and inventory turnover.
The stock price has been dropping since 2013, even with improvements in productivity and capital structure, and the inevitable improvement in profitability will drive a higher ROE and stock price.
The author is long CTHR.
