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Value Found in Value Line?

Something is amiss despite strong balance sheet figures

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Mark Yu
Jan 03, 2017
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Shares of Value Line (

VALU, Financial) dropped 8.55% with a 65-day average regular volume on Dec. 29. No news seemed to surface that day, while the broader Standard & Poor 500 index closed flat or -0.03%. GuruFocus data indicated that Value Line had a trailing 12-month price-earnings ratio of 17 times (industry median 16), price-book ratio of 5 times (industry median 1.3) and price-sales ratio of 4.5 times (industry median 0.9).

Value Line also had an attractive trailing dividend yield of 3.48% with a 59% payout ratio and a 0.4% share buyback ratio.

Recent earnings performance

Value Line reported its second quarter and first half business performance for fiscal 2017 on Dec. 13. The $187 million investment research company delivered a strong 44.8% sales growth to $25.3 million and an impressive 90.7% profit growth to $7.81 million. Despite these great figures, Value Line’s shares traded with a low volume the following day and closed negative 4.2%.

As observed, the investment research company would have had -1.7% sales growth if not for a one-time sales gain of $8.1 million regarding a fulfillment and warehouse operating facility. In review, this was the only time in the past five years that Value Line recorded any property sales, except for a $50.5 million gain that took effect when the company deconsolidated its investment management subsidiaries, EAM LLC and ESI, back in 2011.

Meanwhile, Value Line had sales, profit and operating margin averages of -6.62%, -28% and 9% over the past five years (1).

Market performance

Over the past five years, Value Line had a total return of 16.8% while the S&P 500 index returned 14.7% (1). In 2016, Value Line also outperformed the broader index with an impressive 40% (versus 12.5%).

02May2017141244.jpg

(10-K)

Value Line

Value Line was founded in 1931 by Arnold Bernhard. In its filing, Value Line’s core business is producing investment periodicals based on underlying research and making available copyright data, including certain Proprietary Ranking System and other proprietary information, to third parties under written agreements.

Value Line markets under well-known brands, including Value Line, the Value Line logo, The Value Line Investment Survey, Smart Research, Smarter Investing and The Most Trusted Name in Investment Research.

Previously, Value Line also ran its asset management and mutual fund distribution businesses. Brought on by a Securities and Exchange Commission (SEC) fraud case in 2009, Value Line, along with its two former executives and an affiliated broker, agreed to settle with $45 million and restructure its business.

According to Crain’s, the fraud began in 1986 and ended in 2004 when an insider tipped off the SEC. The “fraudulent practice” involved sending mutual fund trades to brokers who charged inflated commissions and then kicked back a portion of the commissions to Value Line.

Although no parties admitted to any wrongdoing, the SEC required then-Chief Executive Officer Jean Bernhard Buttner to pay a fine of $1 million and to sell her stake in Value Line, put it in a blind trust or otherwise arrange matters so that she no longer controlled the company.

Buttner, the daughter of the founder, had a 100% voting stake in Arnold Bernhard & Co. As of April 2016, Arnold Bernhard & Co. owns 88.5% of outstanding shares of Value Line.

In December of 2010, Value Line completed a restructuring where it made EULAV Asset Management as the successor to substantially all of the operations of Arnold Bernhard & Co. According to company filing’s, the capital structure of EULAV Asset Management was established so that Value Line would have no voting rights over the former, and only to receive non-voting revenue and profits interest of the former.

EULAV Asset Management is run by five individual trustees and a Delaware resident trustee. These trustees are to receive 50% residual profits of the business while the other half goes to Value Line. Value Line also has a 41% to 55% share in EULAV Asset Management revenue.

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(10-K)

As of April 2016, EULAV Asset Management had $2.22 billion in Value Line Fund's assets in management.

Meanwhile, Value Line had three wholly-owned operating subsidiaries: Value Line Publishing, Vanderbilt Advertising Agency and Value Line Distribution Center [3]. In its filings, Value Line only had one reportable segment, publishing, after its restructuring in 2010.

Subscriber count

According to the Crain’s article, there were 134,000 subscribers in the 1980s and had about 70,000 subscribers prior to the SEC settlement in 2008 (2).

Cash, debt and book value

As of Oct. 31, Value Line had $21.2 million in cash and securities available for sale with no debt. The company also had no goodwill or intangible assets with a book value of $38.3 million, compared to $30 million year over year.

Cash flow

02May2017141244.jpg

(10-Q)

Year over year, Value Line lost more of its cash flow, secondary to the gain it recorded in its income statement. Interestingly, Value Line may still have recorded more cash outflow in the recent period, absent of any gains received from selling its facility.

Capitalized software expenditures and allocation for property and equipment acquisitions were $953 million, compared to $931 million in software expenditures alone year over year. Free cash flow for the period was negative $6 million, compared to negative $1.8 million year over year.

02May2017141245.jpg

(10-K and 10-Q)

Value Line, arguably, allocated most of its $11.6 million gains from selling its facility into equity and fixed-income purchases, which amounted to $11.09 million for the period.

Value Line also received a good amount of cash flow from its restructuring of EAM in fiscal year 2011. According to filings, Value Line’s EAM Trust Agreement allows the former to receive 41% to 55% of EAM’s revenues and 50% of the latter’s residual profits.

02May2017141245.jpg

(10-K and 10-Q)

Despite having negative free cash flow figures in first half fiscal 2017, Value Line also provided $4 million in dividends and share repurchases, compared to $3.6 million year over year.

Conclusion

Value Line certainly demonstrated a juicy dividend yield and may capture attention among dividend investors. The company’s solid balance sheet would attract other conservative investors as well.

Meanwhile, sales and cash flow numbers present a declining and unappealing trend of cash flow. The possibility of subscriber reduction could be traced to declining sales figures over time (2). According to the Crain’s article, Value Line’s sales were once in the high $90 million range during the early 2000s. It fell to $69 million in 2008 when it had 70,000 subscribers. Value Line had $35 million in sales as of fiscal year 2016.

In summary, Value Line is a pass.

Notes

(1) Morningstar data.

(2) ME: I was not able to determine exact number of subscribers (active) based on recent 10-Q and 10-K filings. If to be identified by a reader, I would appreciate it and stand corrected.

(3) 10-K

(1) Value Line Publishing is the publishing unit for the investment related periodical publications and copyright data.

(2) Vanderbilt Advertising Agency places advertising on behalf of the Company's publications.

(3) Value Line Distribution Center is the successor to Compupower Corporation. It provides subscription fulfillment services and subscriber relations services for Value Line’s publications and continues to distribute Value Line’s print publications.

Disclosure: I do not have shares in any of the companies mentioned.

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