PSB Monthly Issue January 2011
January 2011
LIFT YOU TO HIGHER PROFITS
Today’s economy is a global economy. Successful companies have to look beyond their domestic borders in order to truly thrive. And, a management team ignoring international growth is doing so at their own peril.
But embracing international expansion can lead a company to big profits.
Here’s the thing…
The domestic economy may be sluggish, but it doesn’t mean there aren’t other areas of growth in the world. In fact, there’s always someplace with a hot economy.
It’s easy to tell when an economy is red hot. But how do you know when an economy is really starting to heat up?
One of the best indicators of an improving economy is the group of companies in the diversified machinery industry. Diversified machinery includes a variety of products from engines, construction equipment, and air conditioners, to valves, pumps, and wiring. The better the companies in this industry are doing, the better the economy is.
Sales of these types of products often increase as the economy grows. Think about it… more engines are needed as more vehicles are built. More buildings going up mean more wiring and pipes.
And, of all the diversified machinery products, one group in particular stands out as the best indicator of economic improvement. That group of products is heavy equipment.
Heavy equipment products, such as construction vehicles, are expensive and specialized. Think cranes, backhoes, dump trucks, cement mixers, and forklifts. You don’t just go out and buy a crane. You need to make sure there’s serious revenue involved to justify those types of capital expenditures.
So when a heavy equipment company is increasing revenues, you can bet there’s legitimate demand out there.
The market for heavy equipment is enormous. Worldwide, we’re talking about over an $80 billion industry. It’s a big deal.
With the global economy set to thrive in 2011, it’s a great time to be a company in this space.
What’s even better?
How about a company in the heavy equipment industry which is already growing like crazy… and expanding into international markets at an exponential rate.
If that sounds compelling to you, you’re going to love Manitex (NASDAQ: MNTX)…
Name: Manitex Ticker Symbol: MNTX Market Cap: $45 million Recent Price: $3.85 PSB Rating System 4.8 Stars Raging Revenue: (4.9 stars) The company is looking at over $90 million in revenue for 2010. And revenues jumped 65% in the third quarter. The upside is even higher with the global economy improving. Beautiful Books: (4.8 stars) Earnings are expected to climb a whopping 75% in 2010. Plus, the company is paying down debt while and increasing working capital. Stellar Structure: (4.8 stars) Insiders’ ownership of 20% shows management is confident in the future. And, institutional ownership of 39% means the smart money likes this company’s potential as well. Valuation Verification: (4.9 stars) The stock is badly mispriced by the market. Based on our valuation analysis, we think the stock is worth at least $8.00 a share. That’s upside potential of 108% or more. Meaningful Milestones: (4.8 stars) The company has posted four straight quarters of profit in a sluggish economy. What’s more, the acquisition of the CVS Ferrari means the company is significantly increasing its presence in the global market. |
THE HEAVY EQUIPMENT BUSINESS
MNTX is a leading provider of heavy lifting equipment. By lifting equipment, I mean cranes, boom trucks, and forklifts. Basically the kind of hulking machines you’d see at a construction site.
The company’s products are used extensively in several types of industries. These varied industries include commercial building, utilities, infrastructure – such as roads and bridges, railroads, rental fleets, cargo transportation, and energy extraction and transportation.
With so many industries using heavy equipment, you can see why MNTX’s products are an excellent indicator of economic health. And clearly, the company is selling highly sought after products.
Here’s the deal…
As you might expect, MNTX’s products aren’t cheap. They’re huge pieces of machinery and highly specialized. These are major capital purchases for the buyers. In other words, you’d expect purchases of equipment to fall when a company is hurting for cash or worried about the economy.
And to some extent, sales did go down for MNTX – in the U.S. Fortunately, management picked a great time to ramp up the company’s international sales.
In fact, international sales provided 35% of the company’s growing third quarter revenue. You know what’s amazing… two years ago international sales were basically zero.To say management has been successful increasing sales outside of the US is an extreme understatement.
And that’s not all…
MNTX is growing rapidly – and intelligently – through strategic acquisitions.Management is entering niche, high growth markets by purchasing smaller companies in the industry.
For example, MNTX recently purchased CVS Ferrari – no, not the Italian sports car – these Ferraris don’t move quite so fast. CVS Ferrari is Italian though, and they also make heavy lifting equipment.
This strategic acquisition will significantly boost MNTX’s presence – and revenues – in Europe. It’s one of the reasons why the company posted great third quarter numbers even though the domestic economy has been mediocre at best.
I’ll get back to the numbers in a minute. First, let’s talk about how bright the MNTX’s future looks…
As I mentioned, the company is rapidly expanding overseas. Even better, the global economy is just hitting its stride. Growth in countries like China, India, and Brazil isn’t slowing down anytime soon.
What’s more, the US economy is just now getting on track. That means MNTX could be reaping the rewards of a growing economy on two fronts! Now that’s a way to pull in big profits.
While management is growing the company quickly, they’re also growing it intelligently. Large increases in revenues haven’t stopped management from cutting costs and paying down debt. That’s an earmark of a strong management team.
Now let’s take a closer look at the company’s financials.
THE NUMBERS
It’s one thing to talk about growth, now let me show you just how well MNTX is doing.
The company pulled in $24.9 million in third quarter revenue, a robust 65% increase year over year. And, revenues jumped 27% sequentially from the second quarter. Clearly, MNTX is seeing heavy demand for their products.
What’s more, the company earned $0.06 a share in the third quarter. At this time last year, the company posted a loss. They’re definitely headed in the right direction… and in a big way.
MNTX’s also has an excellent management team.
Last quarter, the company paid down $1.2 million of debt from cash reserves. At the same time, the company’s current assets are a stellar 2.7x current liabilities. So, management has been able to pay down debt while still keeping current assets at a high level. Yet another positive sign.
Finally, MNTX’s backlog of orders increased 49% from a year ago to $32.8 million. Heavy equipment orders take time to complete… and it’s a great sign for future revenues to see the company with so many orders left to fill.
INVESTMENT RISKS
As we’ve discussed before, no investment is without risks.
The company’s growth depends in part on international growth. If the overseas economy slows down, it could cut into future sales.
Another risk is a prolonged slowdown of the US economy. MNTX still sells a majority of its products to domestic customers, so revenues could decline if the US economy doesn’t grow in 2011.
Finally, higher interest rates could pose a minor risk. Higher rates could increase debt costs to the point where management would have to prioritize paying down debt rather than growing profits.
POTENTIAL RETURNS OF 108% OR MORE
Although MNTX is experiencing strong growth, shares are cheap.
At a recent price of $3.85, MNTX shares are trading at just 9x earnings. Meanwhile, the industry average is at a far higher 23.1x earnings. If MNTX simply trades at the industry average, the share price would jump 157%.
Trading at the industry average is well within reason for a company with strong growth and an adept management team. Even at a more conservative 18x earnings to determine price. That would work out to $7.70 a share, or a stellar 100% return.
From the chart below, you can see back in 2007, MNTX shares traded well over $8.00. With the economy improving and the company’s sales growing, there’s no reason to believe the stock can’t get back to those levels. And I actually expect it to go much higher.
Investors are already sensing the opportunity in MNTX. Shares have gotten a boost in recent trading. But don’t worry… it’s still got a long way to go. And it’s a great sign investors are recognizing the value of this company.
It also means we need to jump on this opportunity quickly.
Based on our analysis, we see the stock trading up to at least $8.00. Buy MNTX now for potential gains of 108% or more.
ACTION RECOMMENDATION
BUY Manitex (NASDAQ: MNTX) up to $4.25 per share.
Recent price is $3.85.
Use a stop-loss of $2.50 on this position.
Don’t forget your position sizing and stop-loss rules.
WITHOUT PAYING $329 A SHARE
The latest numbers are out…
And it’s official….
Touch screen fever is sweeping the globe!
No doubt about it, consumers the world over are clamoring for smart phones featuring touch screen technology. The Apple iPhone has become a worldwide sensation. And smartphones running Google’s Android software are flying off store shelves.
But smartphones aren’t the only devices cashing in on the frenzy for touch screens.
Apple’s latest invention – the iPad – is also taking the world by storm.
The iPad was launched with great fanfare in April 2010. Since then, consumers have been snapping them up as quickly as Apple can make them. And it’s not hard to see why.
The iPad has a bigger screen than an iPhone, but it’s smaller, lighter, and easier to tote around than a laptop. It also offers a brilliant 9.7 inch LED display with the same multi-touch technology used on the iPhone. Millions are making the iPad their number one way to surf the web, manage email, and watch videos.
And, don’t forget about e-readers.
Products like Amazon’s Kindle and Barnes & Noble’s Nook saw huge sales growth in 2010. At less than half the cost of an iPad, these gadgets are fast becoming the preferred way to buy and read books.
Clearly, demand for gadgets with touch screens is going through the roof.
But don’t just take my word for it, check out the most recent global sales numbers for 2010…
- Over 270 million smartphones sold (a 55% increase over 2009)
- More than 20 million tablet PCs sold
- And over 6 million e-Readers sold
That’s a whole heckuva lot of touch screens…
And it’s just the beginning…
Industry experts are forecasting huge sales increases across the board for touch screen gadgets in 2011. Market researcher, IDC, estimates 330 million smartphones will be sold this year. And some industry insiders are quietly predicting smartphone sales could end up as high as 500 million units.
But that’s nothing compared to the expected growth in tablet PCs.
After a stunning introduction last year, tablet PCs are expected to sell like hotcakes in 2011. Apple’s coming out with their second version of the iPad. And Apple’s competitors are lining up to introduce their own tablet PCs this year.
These companies clearly know a hot new market when they see it.
How hot is it?
IDC sees tablet PC sales more than doubling to over 42 million units in 2011. And Gartner sees even stronger demand. They’re predicting sales will nearly triple to 60 million tablets. Given the furor over the iPad, these estimates could be well under the mark.
And surprisingly, it looks like the fascination with tablet PCs is driving stronger demand for eReaders.
Gartner estimates eReader sales will jump 68% to 11 million units in 2011. However, sales figures could end up being much higher. A recent JP Morgan survey shows an astounding one-third of all internet users plan on buying an eReader.
We’re talking hundreds of millions of people.
So, what does all this mean for investors?
It means you can make a lot of money investing in companies catering to the insatiable demand for touch screen gadgets. And I’ve found a great little company cashing in on this hot trend.
ZAGG Inc. (NASDAQ: ZAGG) is making money hand over fist selling accessories for all manner of touch screen devices. Keep reading for the lowdown on this fascinating company.
Name: ZAGG Inc. Ticker Symbol: ZAGG Market Cap: $180 million Recent Price: $7.62 PSB Rating System 4.8 Stars Raging Revenue: (4.8 stars) Revenue is expected to jump 28% in 2011 to nearly $87 million. And a stronger economic recovery could boost sales even higher. Beautiful Books: (4.8 stars) Earnings are expected to surge 21% in 2011 to $0.47 per share. And better than expected demand for smartphones and tablet PCs could drive that estimate even higher. The balance sheet is rock solid with $5 million in cash and no debt. Stellar Structure: (4.7 stars) Insider ownership is very strong at 38% of shares outstanding. Insiders are clearly confident in the company’s future. Institutional ownership is low at just 8%, but offers plenty of room for strong institutional buying. Valuation Verification: (4.7 stars) Despite a robust growth outlook, the stock is nicely undervalued. Based on our valuation analysis, we think the stock is worth at least $13.16 a share. That’s upside potential of 73% or more. Meaningful Milestones: (4.8 stars) The company recently released their latest accessory for the wildly popular iPad. And they’ve already sold $2 million worth since November. |
THE TOUCH SCREEN DEVICE ACCESSORIES BUSINESS
ZAGG is a leading provider of protective coverings, audio accessories, and power solutions for consumer electronic and handheld devices. Their products are sold under the following brand names – invisibleSHIELD, ZAGGaudio, and ZAGGskins.
The company’s business strategy is as ingenious as it is simple.
They cater to the consumer’s need for protecting expensive portable devices without taking away from their look, feel, and functionality. You see, most device cases are bulky and hide the device’s aesthetic design. (Despite this obvious drawback, the market for protective cases has already grown into a $38 billion a year industry.)
ZAGG, however, has developed a new technology to remedy this problem.
It’s a revolutionary clear protective film covering called invisibleSHIELD. This amazing film adheres to the surface of a device like a second skin that’s invisible to the eye. And it’s durable enough to protect your device from nasty scratches and scrapes.
Don’t believe it?
Check this out.
The invisibleSHIELD film was originally developed to protect the leading edges of rotary blades on military helicopters. If it can stand up to these high friction, high velocity conditions, it can certainly protect your handheld device from everyday wear and tear.
But here’s the key…
The film is designed to allow touch sensitivity. This means it can be used on nearly every kind of touch screen device. In other words, it’s the ideal protective covering for those devices most likely to get damaged.
In fact, invisibleSHIELD is designed specifically for a wide variety of devices.
They make screens for iPods, iPhones, iPads, laptops, cell phones, digital cameras, watch faces, GPS systems, and gaming devices. Currently, ZAGG offers over 4,000 pre-cut designs. And they stand behind their product through a lifetime replacement warranty.
If you’re still not convinced, try this on for size.
ZAGG has sold over 7 million invisibleSHIELD products in just a few short years.
Despite the success of their flagship product, ZAGG is not resting on their laurels. Little over a year ago the company introduced a variation of invisibleSHIELD called ZAGGskins.
This popular product combines the scratch protection of invisibleSHIELD with the consumer’s need for personalization. To create a ZAGGskin, you need only select a design from the company’s library or upload your own image or photo. ZAGG then takes the design and merges it with the invisibleSHIELD film.
The result… a unique protective film that gives your device a personalized look.
And that’s not all…
ZAGG recently introduced their latest accessory.
Called the ZAGGmate, it’s a protective case for the wildly popular iPad. The case is made of aircraft-grade aluminum with a high quality finish. And it includes a built-in wireless keyboard.
The ZAGGmate is already a big hit with consumers…
Since late November, the company has sold and shipped over $2 million worth of ZAGGmates. And given the popularity of tablet PCs, they’re just ‘scratching the surface’ of this rapidly expanding market niche.
But great products by themselves don’t guarantee success. You have to have an effective distribution strategy. And ZAGG doesn’t disappoint on this critical element.
The company’s products are available through several different retail channels.
You can buy ZAGG products at leading electronics retailers like Best Buy, Radio Shack, Staples, and Target. They’re also available through major wireless carriers such as Verizon, AT&T, and Cricket. And of course, you can buy ZAGG products online at the company’s website.
As you can see, ZAGG is perfectly positioned to take advantage of the explosive growth in portable electronic devices.
They’re emerging as the leader in protective film coverings. They have solid distribution channels. And they’re leveraging their early success by expanding into new markets.
Let’s take a look now at how this success is impacting the company’s financials.
THE NUMBERS
As you might have guessed, ZAGG is growing by leaps and bounds.
Nowhere is this growth more evident than in the company’s most recent quarterly figures. Revenue soared 137% to just over $23 million. Net income increased a whopping 333% to $3.9 million. And earnings quadrupled to $0.16 per share.
Red hot growth any way you slice it.
The company’s clearly benefiting from the popularity of the iPhone 4, iPad, and other new mobile devices. A trend that’s likely to continue for years to come.
In fact, the outlook for 2011 is very strong indeed.
Revenues are expected to increase by an impressive 28% to nearly $87 million. And earnings are forecast to jump by a solid 21% to $0.47 per share.
However, as strong as these estimates are, they could be heading even higher in the months ahead. The 2011 earnings estimate has already been bumped 42% higher in just the past few months.
And you know what rising estimates mean… higher stock prices ahead!
In addition to robust growth, the company also sports a clean balance sheet.
They’re sitting on over $5 million in cash with no debt. Current assets are a healthy 2.4x current liabilities. And they’re cash flow positive to the tune of $1.82 million over the past 12 months.
Rapid growth and a sound financial foundation… what’s not to like?
INVESTMENT RISKS
Of course, an investment in ZAGG is not without risk.
The company’s strong growth outlook depends on the global economic recovery continuing. A slowdown could impact consumer spending on electronic devices and ZAGG’s accessories.
Another risk is the company’s reliance on the continued introduction of new portable electronic devices. Any slowdown in the release of new devices could hurt ZAGG’s growth.
A third risk is the company’s dependence on consumers continuing to prefer ZAGG’s products over the competition. If consumer tastes change, ZAGG’s business could suffer.
POTENTIAL RETURNS OF 73% OR MORE
ZAGG shares have enjoyed terrific growth over the past twelve months. The stock’s up more than 100% in that time.
But I believe this is just the beginning…
Given the growth outlook for smartphones, tablet PCs, and other portable devices, it certainly looks like consumers will be buying a huge number of protective films and cases. Who spends hundreds of dollars on a device without shelling out another $25 to protect the all important screen?
It’s a small price to pay for peace of mind.
And if the frenzy for tablet PCs continues this year, we should see ZAGG sell an awful lot of ZAGGmate cases. These sell for $69.99 by themselves or $99.99 with the keyboard. Big growth in ZAGGmate sales could easily provide a huge bump in the top and bottom lines.
Nevertheless, despite the strong growth outlook, ZAGG shares are nicely undervalued.
At a recent price of $7.62, the shares are trading at just 16x the 2011 earnings estimate. That’s below the industry average P/E of 17x. And it’s a big discount to the projected annual growth rate of 28%.
If the company’s red hot growth continues, I can see their P/E expanding to a level more in line with the projected growth rate. Based on the current 2011 earnings estimate, we could multiple expansion drive the shares up to $13.16.
That would be a solid gain of 73%.
What’s more, we could see earnings estimates moving higher from here. Remember, analysts have been raising numbers steadily over the past few months. Of course, a higher earnings estimate will drive the share price higher as well.
Based on our analysis, we see ZAGG trading up to at least $13.16. Buy shares now for potential gains of 73% or more.
ACTION RECOMMENDATION
BUY ZAGG (NASDAQ: ZAGG) up to $8.38 per share.
Recent price is $7.62.
Use a stop-loss of $3.81 on this position.
Don’t forget your position sizing and stop-loss rules.
- We adjusted our buy price for MFA Financial (MFA) to reflect a dividend of $0.235 per share paid at the end of December.
- In our most recent Position Update, we recommended you Sell SMART Modular Technologies (SMOD).
Category: PSB Monthly Issues
