PSB Monthly Issue January 2013
January 2013
We’ve been waiting for a Fiscal Cliff deal to come out of Washington for quite some time now. And yet again, the current members of Congress have taken until the very last possible second to finalize a deal…
The good news is both the Senate and the House of Representatives have passed a bill to avert huge tax hikes that had the potential to send the US economy back into recession.
The gist of the bill keeps the “Bush Era” tax cuts in place for those individuals making less than $400,000 and couples making under $450,000.
In addition, the recent legislation permanently fixes the alternative minimum tax (ATM) and prevents a tax hike to nearly 30 million middle and upper-middle income tax payers.
While the list is far too extensive to go over item by item, one rather important feature of the law is the extension of the “doc pay” fix to the cuts in Medicare. For the next year, this bill will block the 27% cut in Medicare payments to doctors.
By acting on just this one piece of legislation, Congress has certainly saved hundreds of thousands of medical jobs from being cut. If doctors were to see a cut of 27%, you’d certainly see office staff, nurses, as well as many other jobs lost in the process.
Now here’s where it gets really interesting…
With the tax hikes averted and certain tax hikes and government spending agreed upon, business leaders will now have the certainty they’ve been waiting. You see, over the past year, many of America’s top business leaders have voiced they were hesitant to run out and hire more staff if it was believed the country was heading back into recession.
That’s quite understandable, as they‘ve just starting recovering from the Great Recession. The last thing they’d want to do is put their company in the exact same position yet again.
What’s important to note is that US economic data has been on the rise for quite some time. For example, this week’s ISM Manufacturing report for December expanded to 50.7 versus the previous month’s reading of 49.5.
A reading over 50 indicates manufacturing is growing once again. In addition, of the 10 subcomponents of this reading, seven are showing improvements and are above 50.
Not only is manufacturing improving, but other drivers of the US economy such as housing and employment are on the rise as well. In fact, S&P’s Case Schiller has called a bottom in the housing market… and most recently reported a 4.31% jump in their Composite-20 home price index for October.
All these gains in the US economy could have been even stronger if businesses weren’t idly waiting for US politicians to do the job they were elected to do.
But now that the Fiscal Cliff is a thing of the past, business can once again plan for economic growth. In order to meet an increase in business, many of them will need to hire additional staff.
To help them hire new staff, the vast majority of employers will turn to various internet job boards to find the talent they need. And when you think of internet job searches, the first name that comes to mind also happens to be the biggest…
Introducing Monster Worldwide (NYSE: MWW)…
Name: Monster Worldwide Ticker Symbol: MWW Market Cap: $658.1 million Recent Price: $5.92 PSB Rating System 4.9 Stars Raging Revenue: (4.6 stars) While total revenue ticked lower in last quarter, revenue from continuing operations is on the rise. In addition, revenue is virtually certain to jump now that the Fiscal Cliff was averted. Beautiful Books: (4.8 stars) MWW has plenty of cash on the books, and a current ratio of 1.17x. While we’d like to see more assets, Monster can easily take care of any outstanding liabilities. Stellar Structure: (5.0 stars) Institutional ownership is off the charts at 95.77%. That doesn’t leave much room for insider ownership, but they still have close to 1.8% of the float. Valuation Verification: (5.0 stars) The price to book ratio for MWW is a steal at 0.67x. What’s more, the P/E is a clear deal at 8.7x. Meaningful Milestones: (4.8 stars) MWW continued to buy back shares of their stock. The company purchased $25.6 million worth in the second quarter this past year, and another $6.7 million in the most recent quarter. That ultimately adds to future EPS earnings for shareholders. |
THE ONLINE EMPLOYMENT BUSINESS
Monster Worldwide provides online employment solutions all over the globe. MWW offers solutions and technologies across a range of public and private sectors.
Currently, MMW has over 4,400 full time employees located around the globe.
The company uses multiple outlets including the Web, mobile apps, and social media to connect employers with job seekers at all levels in the Americas, Europe, and Asia. Monster’s services and solutions include searchable job postings, resume database access, recruitment media solutions, and other career-related content.
In addition, MWW helps jobseekers to search job postings and post their resumes on its career websites. But most of the revenue comes from employers and human resources companies that advertise jobs, search its resume database, and utilize career site hosting and recruitment media.
It serves individuals, small and medium-sized organizations, enterprise level organizations, and educational institutions. Other clients include federal, state, and local government agencies through a field sales force, telephone sales force, and an online service.
Some of Monster’s competition includes LinkedIn, Glass Door, The Ladders, Dice, and CareerBuilder. Back in August of 2010, MWW purchased the assets of the job search site Hot Jobs from Yahoo! costing the company $4.6 million in acquisition expenses. This helped Monster eliminate a major threat at the time.
Now that you know more about Monster’s business, let’s take a look at the numbers…
THE NUMBERS
For the quarter ending September 2012, revenue fell from the $248.5 million in 2011, to just over $221.7 million. While we never want to see a decline in revenues, it’s important to note that the decline in revenue has been relatively mild given the huge surge in competition. This tells me that the Monster brand has stood the test of time.
Looking at the bottom line, MWW posted a net loss of $163.9 million. The majority of this loss was from discontinued operations. In fact, the loss from discontinued operations cost the company $233.2 million this quarter. Looking at the current business, income from continuing operations rose from $0.15 per share for the same quarter in 2011, to $0.35 per share in 2012. That’s a 133% jump in income over the same quarter last year!
Think of it this way… the loss from discontinued operations has already impacted previous shareholders. So the boost in revenue from continuing operations is what prospective investors can look to benefit from.
The loss from past events is why we have our buying opportunity in such a top name job search site…
Looking at Monster’s books, total assets are $1.7 billion while total liabilities are just $803 million. The good news is the company only has $549 million in current liabilities, and just over $642.6 in current assets. That gives MWW a current ratio of 1.17… which means they can easily cover their current liabilities.
What’s more, MWW has roughly $1.50 per share in cash on hand. Better still, the company has a very comfortable 0.2x debt to equity ratio- meaning we’re not worried in the least about Monster taking care of their debt.
Looking solely at the books might make some investors shrug their shoulders at this recommendation. However, we’ve just had a major game changer in the Fiscal Cliff legislation. If we get the hiring all the CEOs said they were holding back on, we should see job postings increase at a rapid rate over the next few quarters.
INVESTMENT RISKS
As with any investment, MWW does have a few risks.
As we noted above, Monster has quite a bit of competition. If any of the other sites takes a major portion of Monster’s business, revenues and income could fall.
Also, if any of Monster’s international divisions underperform due to various global recessions, the company’s bottom line may be impacted.
Finally, if a new Congress makes any changes to current legislation, we may see a reduction in economic activity which could reduce the level of new hirings.
POTENTIAL RETURN OF 168% OR MORE
At these levels, Monster’s stock is seriously undervalued by the markets.
With a price to equity (P/E) ratio of just 8.8x, MMW is trading at about half the industry average right now. If shares of Monster traded in-line with the industry average P/E of 15.1x, we could see a gain of 71%!
But that’s not all…
With a price to book ratio of just 0.67x, MWW is significantly trailing the industry average of 1.8x. Remember, the book value tells you how much you’re paying for the underlying assets of the company. If it were sold off in pieces, the book value is how much the assets would be worth.
If Monster’s stock traded up to the industry average price to book ratio, we’d see a gain of 168%!
Between the low P/E ratio, the ridiculously low price to book ratio… shares of MWW should be trading much higher in future quarters. And given the huge upside potential now that the Fiscal Cliff is resolved, revenues at Monster could see significant growth.
Based on our analysis, we see MWW trading up over $9.95 a share. Buy MWW shares now for potential gains of 168% or more!
ACTION RECOMMENDATION
BUY Monster Worldwide (NYSE: MWW) up to $6.50 per share.
Recent price is $5.92.
Use a stop-loss of $4.75 on this position.
Don’t forget your position sizing and stop-loss rules.
Certain medical providers were just handed a lifeline by Congress. Just like our last trade, the recent Fiscal Cliff legislation has created investment opportunities- and this time it’s in the long-term care facilities industry.
In this industry, the biggest part of the legislation revolves around a one year delay in the 26.5% reduction to Medicare physician reimbursement rates. To pay for this freeze, a number of cash outlays in the system took a hit.
For starters, hospitals will face a $10.5 billion reduction in Medicare payments over a decade for inpatient or overnight care. Hospitals are seeing a double whammy as they were also cut an additional $4.2 billion from Medicaid over the next 10 years.
Other sources of “dollar for dollar” pay funding came from the following-
- $600 million through a competitive bidding system for (OTC) diabetic test strips
- $1.7 billion from eliminating the Medicare Improvement Fund
- $2.5 billion from adjusting the coding intensity between Medicare Advantage and Medicare fee-for-service
- $4.9 billion from payment adjustments for end-stage renal disease
As smart investors, we need to keep our eyes open to changes in trends and legislation. Most times, these two events alone present us with the best investments. And that’s exactly the case here…
For example, many companies focused on providing health care or running health care facilities have been awaiting the pending changes due to sequestration. As I pointed out above, you can see that hospitals are the clear loser of the latest legislation.
But surprisingly, long-term health care facilities were left untouched. Let’s take a closer look at some of the details…
Long-term care operators saw Congress choose not to cut their Medicare payments through sequestration. Better still, these facilities saw an extension of the Medicare Part B therapy caps extension process. Also, Congress did not act to lower the ceiling on allowable bed taxes, or “provider assessments”.
Name: Five Star Quality Care Ticker Symbol: FVE Market Cap: $253 million Recent Price: $5.28 PSB Rating System 4.8 Stars Raging Revenue: (4.7 stars) FVE posted a nine-month revenue increase of 11%. In addition, quarter over quarter revenue growth still looks good. Now that the additional acquisitions are on the books, we should see more revenue growth. Beautiful Books: (4.7 stars) Even though the company only has a current ratio of 0.81x, FVE still has 357x interest coverage. What’s more, they only have a debt to equity ratio of 0.21. Stellar Structure: (4.8 stars) Institutional ownership is very strong at 48.4%. Clearly the big investors know a good value when they see it. Valuation Verification: (4.9 stars) FVE shares are significantly under-valued by the market. Both the P/E and price to book ratios make a compelling value play. Meaningful Milestones: (4.8 stars) Last year’s sale of their institutional pharmacy business to Omnicare shows that management is serious about focusing on their core profitable businesses. Since 2011, FVE has acquired nearly 8,000 units at independent and assisted living communities. |
Keep in mind, there’s always the chance that some of these reimbursements may be cut in the next round of Congressional negotiations tackling the debt ceiling. But odds are, since last year’s “2% Medicare across the board rate cut” proposal by House representative Paul Ryan never became law, Congress will more than likely avoid this broad stroke approach once again.
The bottom line on the latest legislation clearly puts long-term care facilities back on investor’s radar. In essence, it provides a bridge to cover the gap until Obama Care starts in 2014. When the Affordable Care Act kicks in, there will be more options available to seniors for home care and long-term care facilities.
Also, keep in mind that our population continues to age due to improvements in healthcare. In fact, the U.S. Census Bureau anticipates the 85+ population is expected to grow by 20% between 2012 and 2024. Yet the average annual construction of new long-term care units has dropped by 60% since 2007!
That means current and growing long-term care companies are poised to benefit from an aging population and more accommodating legislation to pay for these services.
Smart investors seeing this trend now can position themselves to benefit before other’s catch on. To capitalize from this coming trend and change in legislation, I found a diverse long-term care operator to get us into the game.
Introducing Five Star Quality Care (NYSE: FVE)…
THE LONG-TERM CARE BUSINESS
Five Star is one of the largest publicly traded operators of senior living communities in the United States. Currently, FVE operates 252 independent living, assisted living, continuing care retirement communities, and skilled nursing facilities (SNF). These properties hold over 28,000 units.
Breaking this down further, Five Star owns 31 private pay communities with 3,000 units. In addition, FVE manages 30 senior living communities with 4,500 units.
When we look at the company’s properties by type, over 76% are assisted living… with 12% being Alzheimer’s, and 12% independent living. And Five Star has amassed a presence in 30 states. Take a look at the breakdown below…
That’s a pretty impressive presence for a company with a $253 million market cap.
In addition, since 2011, FVE has added, or plans to add, almost 50 mostly private pay independent living and assisted living communities. What’s more, management recently sold its institutional pharmacy business to Omnicare for a pretax capital gain of $23.3 million. This tells me Five Star’s management is focusing on their core business of operating private pay senior living communities.
As you can see, FVE is not only focused on growing through lease and acquisitions, but the company is also focused on growing their occupancy rate to increase profitability. And recent legislation may be able to assist in that endeavor.
Now that you know more about Five Star’s business, let’s take a closer look at the numbers.
THE NUMBERS
For the quarter ending September 30, FVE grew revenues to $332 million. That’s topline growth from the same quarter in 2011 of 7.1%. If we take a look at the nine-month comparison, revenue jumped from $891 million in 2011, to $991.7 million in 2012.
That means, Five Star was able to grow nine-month revenue by more than 11%on a year-over-year basis.
Looking at income, FVE generated $16.4 million in the last quarter. That compares to a third quarter loss of $528,000 in the third quarter of 2011. When looking out to the nine-month picture for income, the company reported over $21.4 million for the first three quarters of 2012 compared to just $8.8 million in 2011. That’s bottom-line growth of 143% over a nine-month period!
Now, when we take a peek at Five Star’s books, we can see the company has $14.2 million in cash, with current assets totaling $128.4 million. For a company like FVE, total assets are important to consider. In this respect, the company has over $563 million in long-term assets.
On the liability side, Five Star has $157.9 million in current liabilities with just $102.8 million in long-term liabilities. Dollar for dollar, FVE has far more assets than liabilities on the books.
While things look good financially, Five Star has investment risks just like any company.
INVESTMENT RISKS
Legislation changes in upcoming negotiations could possibly impact long-term care facilities, and/or other Medicare and Medicaid policies. Such changes could reduce the profitability of the company.
If the company sees a significant reduction in occupancy rates, profitability and income can be negatively impacted.
Finally, FVE faces competition just like any other industry. If consumers’ taste in long-term care change dramatically, or quality of care slips at any of their facilities… the company can see a drop-off in business.
POTENTIAL RETURNS OF 247% OR MORE
Shares of FVE are significantly mispriced by the market. Currently, the company’s stock is trading at just $5.28. At this price, the company is boasting a ridiculously low price to equity ratio (P/E) of just 4.2x.
If FVE were to trade up near the industry P/E of 14.6x, we could see a gain of 247%!
In addition, Five Star is trading at a discount to its book value. The book value of a company represents what the company would be worth if it were sold off and the pieces. Right now FVE has a price-to-book ratio of just 0.84x. Buying a stock when it’s priced less than book value provides investors with a certain level of safety built-in.
Given the low price to book ratio and attractive P/E ratio, Five Star shares are a terrific investment at these levels.
Recently, shares of FVE successfully re-tested a support level near $4.50. And as legislators came closer to a Fiscal Cliff resolution, the stock started climbing.
Based on our analysis, we could see shares of FVE trade near $13 once properly valued. That would give us a gain of more than 247%. Buy shares of FVE for gains of 247% or more!
ACTION RECOMMENDATION
BUY Five Star Quality Care (NYSE: FVE) up to $5.80 per share.
Recent price is $5.28.
Use a stop-loss of $4.45 on this position.
Don’t forget your position sizing and stop-loss rules.
Boy, it sure seems likes the Fiscal Cliff legislation was well received by the markets. In fact, the overall markets were up anywhere from 2.3% to 3% on the first trading day of 2013. And the best part… our portfolio simply took off!
In fact, we saw new peak returns in yesterday’s trading for six of our portfolio positions.
Here’s the breakdown…
CULP (CFI) reached a new high before settling down a bit near $15.59. The peak return hit a massive 90%!
Carriage Services (CSV) simply exploded higher in yesterday’s trading by over 13%… shooting the stock to a new high of $13.52. So far on this trade, we’ve seen a top return of 157%.
Aceto (ACET) also reached another high yesterday. The run in this stock has been nothing short of amazing. In fact, ACET is now trading near $10.48, representing a 31% gain. The stock rallied to a return of 33% before pulling back a bit on Wednesday.
The list goes on and on…
We’re up by 13% in just a month on Travel Centers (TA) shares. Cobra Electronics(COBR) also reached a high of $3.90, posting a gain of 11%. And Krispy Kreme(KKD) continues to climb… giving us a 57% peak return in yesterday’s trading.
This issue, we’re not selling any current holdings. In fact, I think we’re looking at the next leg up for stocks overall. Selling anything for a loss right now would be downright foolish. What’s more, many of our big gainers are in position to simply pour it on, so to speak.
Hold everything, and I’m certain we’ll have great news to report mid-month.
Category: PSB Monthly Issues
