10/31/2010

Increase in Book Value versus Price Change (potential overlooked value creation)

I’m always searching for new and improved methods to uncover mispriced equities. Fortunately the market keeps offering both over and undervalued stocks. Some of my efforts are focused on developing techniques to find these mispriced ideas before the market eliminates these inefficiencies.


For this post I wanted to find stocks that increased net tangible assets over several years (2006 to TTM) but the stock price has lagged on a percentage basis versus the change in book value. I started to work on this a few weeks ago but never posted some of my results. But it was encouraging to read a 10/29/10 post at Greenbackd ; “Donald G. Smith on price-to-tangible book value”

<<"So it dawned on me that P/E and earnings were too volatile to base an investment philosophy on. That‘s why I started playing with book value to develop a better investment approach based on a more stable metric. ">>

As with all posts on Greenbackd, it’s worth a read. Click the link below to read


Two ideas that have substantially increased book value relative to the change in price that may have interest are PHC and HSKA. Please be aware these two stocks have challenges and should be looked at more closely. Today’s post was to introduce a method that may uncover overlooked value.


PHC; PHC Inc (Home Health Care)

Current price = 1.36


Market Cap = 26.55 million

Price /EV = 117.65%

Book value moved from .53 2006 beginning balance to .88 for the TTM. Improvements in the cash balance and reduction of debt were some of the main drivers of this improvement coupled with a large increase in the PPE balance (BV increased 60% over this time period) . During this time period the price was reduced from 2.53 to 1.36 (Price was down 46%).

Share count has been stable over the prior 3 year. Average prior 3 year share count / TTM share count = 1.0112 indicating a slight reduction. YOY quarterly revenue increased 20% for the most recent quarter.

EV/Rev = .42

Average FCF over the past 5 years/current enterprise value = 3.20%

EBITDA/EV = 11.25%

$428,000 expended on share repurchases over the past 12 months

SGA/Revenue = 38.56%




HSKA; Heska Corp, (Biotechnology)

Current price = .45

Market Cap = 23 million

Large reduction of debt from 2006, large deferred tax assets have all contributed to the increased in book value from .03 to the current value of .86

Patents, real estate; “production facility located in Des Moines, Iowa, consists of 168,000 square feet of buildings on 34 acres of land, which we own. We also own a 175-acre farm used principally for testing products, located in Carlisle, Iowa.”

Modest insider buying

EV = 36 million

Market cap = 24 million

YOY quarterly revenue has decreased (18% )

EV/Rev = .52 (Historically cheap)

GP/EV = 71%

OI/EV = 3.6%

Average FCF over the past 5 years/current enterprise value = 8.20%

EBITDA/EV = 10.00%

Average prior 3 year share count / TTM share count = 1.0178 indicating a slight reduction.

GP= 28.46 million

EBITDA = 3.72 million



SPRO ($2.40) and UWN ($1.03) also have appeal based on the above thesis.

Please be careful as they all have difficulties and risk.

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