PSB Monthly Issue May 2012
May 2012
BIG BUCKS TO REMODEL
The housing market still hasn’t recovered from the real estate bubble bursting nearly six years ago. But that doesn’t mean Americans have lost their love of homeownership.
In fact, owning a home is still the centerpiece of the American dream.
But the reality is Americans just aren’t moving from one house to another like they were when the housing market was booming.
Today, house obsessed consumers are staying put and remodeling their existing spaces to better suit their needs.
In fact, homeowners spent $269 billion on home improvement projects in 2011. They’re expected to increase spending by 5% to $283 billion this year. And growth is expected to accelerate to nearly 6% per year in 2013 and 2014.
Simply put, companies specializing in home improvement projects are going to make a lot of money in the next few years.
One stock sure to benefit from the increase in home improvement spending is US Home Systems (NASDAQ: USHS).
Name: US Home Systems Ticker Symbol: USHS Market Cap: $61 million Recent Price: $8.49 PSB Rating System 4.8 Stars Raging Revenue: (4.5 stars) Revenues are expected to grow 6% this year and 7% in 2013. But new products could easily fuel growth beyond these conservative estimates. Beautiful Books: (4.7 stars) Earnings per share growth could top 26% this year. And the quarterly dividend is easily paid from the cash they generate from operations. Stellar Structure: (5.0 stars) Insiders own a sizeable 18% stake in the company. And they’ve bought 9,000 shares over the last six months. That’s a big vote of confidence from the people who know the business best. Valuation Verification: (4.9 stars) After a pullback from over $14 per share to around $8.50, USHS looks like a bargain. Based on our valuation analysis, we think the stock is worth at least $14.75 per share. That’s upside potential of 73% or more. Meaningful Milestones: (4.9 stars) The company recently launched its new line of Martha Stewart Living cabinet resurfacing products for sale at the Home Depot. |
THE HOME IMPROVEMENT BUSINESS
USHS is in the specialty product home improvement business.
They manufacture or procure, design, sell and install custom kitchen and bathroom cabinet refacing products, laminate and solid surface countertops and organizational storage systems for closets and garages.
Here’s what makes USHS so intriguing…
They sell all of their products exclusively through The Home Depot (HD). Talk about hot leads… HD customers are obviously spending money on home improvement projects.
Over the last few years, USHS has aggressively expanded the number of Home Depot markets where they offer their services. And they even began selling their kitchen refacing products in Home Depot’s Do-It-Yourself program.
In fact, USHS products are a centerpiece of Home Depot’s “Replace, Reface, Renew” marketing campaign.
But that’s not all…
USHS recently developed a new line of Martha Stewart Living kitchen cabinet resurfacing products. And they just began marketing them in January.
Right now, USHS is in 69 US markets in 37 states. They have the captive audience of every HD customer who walks through their doors. And they’re expanding their line of products to help fuel growth.
Clearly, USHS is well positioned to capture a chunk of the $283 billion home improvement market.
Let’s take a closer at the company’s financials.
THE NUMBERS
USHS has a solid track record of growth…
Last year, revenues increased 13% to nearly $165 million. Net income more than doubled to $4.6 million from $2.2 million. Earnings per share grew 110% to $0.60.
What’s more, they initiated a quarterly dividend in the fourth quarter of last year.
Their explosive growth was the result of strong demand for kitchen and bathroom refacing products, as well as explosive growth in the Home Depot markets they expanded into in 2010.
Here’s the best part…
These same catalysts should continue driving revenue and earnings growth in 2012. And with the introduction of their new Martha Stewart Living line, they should easily exceed expectation.
In addition to strong growth, the balance sheet is rock solid.
USHS is sitting on $14.5 million in cash. They have no long-term debt. And, they generated $7.5 million in cash from operations in the last year.
INVESTMENT RISKS
As with any investment, US Home Systems has a few risks.
They rely on consumer demand and the availability of credit to sell their products. If consumers can’t get credit, their business would suffer.
Another risk is the reliance on an agreement to sell their products exclusively at Home Depot. If this contract is terminated, it would hurt their business.
Finally, negative publicity about Home Depot would negatively impact their business.
POTENTIAL RETURN OF 73% OR MORE
USHS is trading at a significant discount.
Right now, USHS is expected to grow earnings 17% a year over the next five years. But the stock is trading at only 13x earnings. As a result, they’re trading at a PEG of just 0.68.
What’s more, the industry average P/E is 19x. We think USHS deserves a P/E at least equal to the industry.
If USHS were to trade at the industry’s average PE, the stock could surge 44%!
Based on our analysis, we see the stock trading up to at least $14.75. Grab your shares of USHS now for potential gains of 73%!
ACTION RECOMMENDATION
BUY US Home Systems (NASDAQ: USHS) up to $9.00 per share.
Recent price is $8.49.
Use a stop-loss of $5.00 on this position.
Don’t forget your position sizing and stop-loss rules.
It’s no secret the growing middle class in India and China are consuming more products than ever. They’re buying more food, drugs, cars, electronics, and everything in between.
More importantly, it’s a trend that’s expected to continue accelerating for the foreseeable future.
Make no mistake, the companies who are able to meet this growing demand will make a killing. And it’s not just the companies who are selling products to Asian consumers that will profit. Everyone in the supply chain who makes components used in those products will benefit as well.
My point is this…
The ripple effect of growing consumer spending in Asia will have far reaching effect on companies of all shapes and sizes.
One small US based chemical company reaping the benefits of strong growth in Asia isAceto (NASDAQ: ACET).
Let’s take a closer look…
Name: Aceto Corp Ticker Symbol: ACET Market Cap: $238 million Recent Price: $9.07 PSB Rating System 4.7 Stars Raging Revenue: (4.7 stars) Revenues are growing at around 20% per year. And they have a pipeline of new drugs to fuel future growth. Beautiful Books: (4.5 stars) $28 million in cash and $115 million in working capital are strong for this small company. But total debt of $52 million knocks them down a peg. Stellar Structure: (5.0 stars) Insiders own just 2% of shares outstanding. But they bought an additional 63,000 shares in the last six months. And institutional ownership checks in at an impressive 58%. The smart money clearly likes the shares. Valuation Verification: (4.7 stars) ACET is trading at a nice discount. But it won’t be long before investors notice their growing pipeline of generic drugs. Based on our valuation analysis, we think the stock is worth at least $13.60 a share. That’s upside potential of 50%. Meaningful Milestones: (5.0 stars) The company’s expansion from a chemical sourcing company to a full blown generic drug manufacturer has created untold growth potential. |
THE HEALTH SCIENCES BUSINESS
Aceto is a global leader in the marketing, sales and distribution of pharmaceutical intermediates and active ingredients, finished dosage form generics, nutraceutical products, agricultural protection products and specialty chemicals.
They operate in three business segments – Health Sciences, Specialty Chemicals, and Agricultural Protection Products.
In essence, Aceto has carved out a niche as a middle man.
They find a source for a chemical. Then they resell the raw material to companies in the pharmaceutical, agricultural, and special chemical industries.
In fact, they distribute more than 1,100 chemical compounds worldwide.
Simply put, they’re experts in sourcing, regulatory support, and quality assurance.
It’s a skill set that’s served them well for years. And they’ve developed a reputation as a reliable and stable provider of hard to find chemicals needed in many industries around the world.
Now, ACET is taking their business to a new level…
Over the last few years, they committed to focusing on the Health Sciences industry. To that end, they acquired generic drug manufacturer Rising Pharmaceuticals.
Now, ACET can take their expertise of finding cheap chemicals and use it to make generic drugs they sell themselves. It’s revolutionary idea for ACET and one with untold potential.
Rising already has 38 products for sale. And a pipeline of 44 generic drugs in various stages of approval. They’re expected to generate $102 million in sales over the next three years as the brand name drugs lose patent protection.
No doubt about it, ACET has an impressive growth strategy.
What’s more, their extensive knowledge of sourcing chemicals in China and India will allow them to tap into the explosive growth in Asian drug markets. And that’s when we could see their growth skyrocket.
Now, let’s take a look at the company’s financials…
THE NUMBERS
ACET’s business is rock solid and growing.
Revenues grew 19% in fiscal 2011 that ended in June 2011 to $346 million. They’re expected to grow 17% this year and 13% in 2013.
Earnings are expected to increase a whopping 70% this year to $0.58. And analysts are projecting $0.86 next. That’s better than 48% earnings growth next year.
Simply put, ACET is expected to grow hand over fist.
And they have a strong balance sheet to boot…
They have more than $28 million in cash, working capital of $115 million, and they generated $16 million in cash flow from operations last year.
Now, let’s look at some risks…
INVESTMENT RISKS
One concern is there products are subject to prior government approval. If any of their drugs aren’t approved, their sales would suffer.
Another risk comes from operating in the generic drug industry. If they’re unable to launch new drugs, their performance could fall short of expectations.
Lastly, their pipeline of new drugs is subject to regulatory delays at the FDA and other approval agencies.
POTENTIAL RETURNS OF 50% OR MORE
The time is now to grab your shares of this rising generic drug manufacturer.
The market hasn’t given ACET credit for the full potential of its growing portfolio of generic drugs. In fact, it’s trading at a nice discount.
ACET is trading for just 10x forward earnings. And they have a projected growth rate of 22% over the next five years. That means they have PEG of just 0.74.
Based on our analysis, we can see the stock trading up to at least $13.60 per share. Grab your shares of ACET now for a potential gain of 50%.
ACTION RECOMMENDATION
BUY Aceto (NASDAQ: ACET) up to $9.25 per share.
Recent price is $9.07.
Use a stop-loss of $7.00 on this position.
Don’t forget your position sizing and stop-loss rules.
Despite the continued weakness in the Russell 2000 small cap index, our penny stocks are having a fantastic month.
In fact, we ringing the cash register on two successful trades…
- PLX Technologies (PLXT) was acquired by Integrated Device Technologies(IDTI) for $330 million. As a result, the stock shot from aroud $4 to $6.70 earlier this week. Now that the buyout is priced in, lets sell PLXT now for a solid 70% gain. Congratulations on a successful trade.
- Web.com (WWWW) delivered for us again. The online marketing services provider handily beat earnings estimates last quarter. WWWW soared past our $16.25 price target to a high of $16.43. That’s good enough for a double from our $8.12 buy price. Go ahead and sell WWWW now if you haven’t already.
Category: PSB Monthly Issues
