The investing world is often broken down into two broad camps: growth and value. The growth group looks for companies with earnings that are advancing at a material clip. The value camp, meanwhile, looks for stocks that are trading on the cheap. The desire to find undervalued stocks is both emotionally and intellectually appealing—after all, who doesn’t like to take advantage of a sale? Moreover, value investing follows one of the oldest, and most obvious, sayings on Wall Street, “buy low, sell high.”
The problem is that everyone is trying to buy low and sell high, even the growth investors. So it’s important to properly define “cheap” and have a systematic way of identifying candidates that meet that criterion. Equally paramount is remembering that some merchandise winds up on the sale heap because it is damaged in some way. A fact that is as true for stocks as it is for consumer goods.
To help investors cull through the list of potential investments, Value Line provides weekly screens. One of the more useful screens for value investors is the Bargain Basement Stocks screen. The screen is fairly simple, highlighting companies with price-to-earnings multiples and price to “net” working capital ratios near the bottom of the Value Line universe. The idea is to identify companies that are trading cheaply relative to earnings and to the money that would be “left over” if the company were to be liquidated. Note that most stocks never trade below their liquidation value, but even trading at two or three times that value is noteworthy.
This screen is available every week in the Index section of The Value Line Investment Survey. Subscribers can access the most recent Index here to see all 35 names on the list. One company of interest that we have highlighted is Ingram Micro, Inc. (IM).
Ingram Micro, Inc.
Ingram Micro, Inc. is a Fortune 100 company and the largest global information technology wholesale distributor by net sales. It boasts a wide customer base and impressive geographic diversification, serving more than 170,000 reseller customers in more than 100 countries. Customers include value added resellers, retailers, systems integrators, direct marketers, independent dealers, cloud providers and PC assemblers. Ingram sells hundreds of thousands of technology products worldwide including, but not limited to, printers and scanners; LCD displays; mass storage; cell phones; digital cameras; DVD players; game consoles; rack, tower and blade servers; tablets; business operating systems; security, storage, virtualization, and entertainment software; middleware; switches, hubs, and routers; wireless LANs and WANs, network interface cards, modems, phone systems and video/audio conferencing devices. Beside distributing information technology products, the company also offers services in mobility, supply chain, and cloud-related areas. These include, among others, customization, kitting, activation, fulfillment, inventory management, and around 200 offerings in almost all cloud service categories.
Ingram Micro’s nonGAAP earnings increased a solid 22% in 2013, to $2.37 a share, powered by organic gains and several large acquisitions closed in 2012. By that metric, however, we expect slower growth this year, to around the $2.50 a share level. March-period nonGAAP results came in below forecasts, at $0.43 a share, up just 5% year to year. The main reasons were weakness in China and lower handset sales in Indonesia, while profits were up by double digits in Latin America. All told, nonGAAP operating income increased 6%, but higher interest costs and a stiffer tax rate pared the gain.
IM’s restructuring program cost $39 million in the first quarter (excluded from our figures), or nearly half of the projected total $80 million - $100 million outlay, which will probably be completed by this year’s third quarter. The effort includes headcount reductions in all regions and consolidating many facilities in Europe; it is expected to yield a similar $80 million - $100 million in annual pretax cost savings by 2015, or $0.35-$0.40 a share. By next year, we also think that earnings will reflect synergies from several cloud-based acquisitions already completed this year. Over the longer term we think nonGAAP earnings can rise at a roughly 10% rate, reflecting a basic mid-single-digit industry growth rate and yearly product and geographical expansions through acquisitions.
Ingram Micro stands out as a conservative choice in the present frothy stock market, with top-15% scores on the price to net working capital, price to earnings, and price to book value metrics. While the company does not pay a dividend, preferring to devote its sizable free cash flow to acquisitions, it also has a beta of .95, well below its peers in the top file of our bargain basement screen. Moreover, it’s ranked to outperform the broader market over the next six to 12 months. Too, its present quote is down about 15% from the recent all-time high, reflecting market disappointment with first quarter results, which we do not think will be a template for the full year or 2015. Conservative investors may want to take a look here.
At the time of its writing, the author did not hold positions in any of the stocks mentioned.