5/25/2014

Value with Quality (moat) outlier

The search for value outliers has no correct static approach. The best method leverages your personal investing strengths and personality. Its an evolving investing style. Its an often modified and evolving set of routines for me. One approach may start by looking for under performance versus industry peers or the market. Time periods used, prior month, quarter, YTD, 2 or more years is one thought. Further, a process of elimination using custom or known value rankings based on multiple metrics. Next you can look for outliers using a scatter plot, tree map that can display hundreds of ideas in one view to begin the process of digging further. The scatter plot example may use F scores on the x axis and % off 52 week high on the y axis with the ability to change axis metrics as appropriate for additional insight. Furthermore, filter/reduce results based on lets say magic formula rankings, m or z scores, financial strength ,EV/Sales, EV/GP, P/B, outstanding shares changes over the past 3 years, book value changes over several years or focus on an under performing industry.Its your discovery journey and investing style. Last week SRI Stoneridge was one of several interesting stock. Unable to find time, I watched and waited 5 days. SRI moved up everyone of those 5 days. 

Intention to post Monday never happened. SRI open Monday at $8.80, Tuesday $9.14, Wednesday $9.60, Thursday $10.00 and Friday closed at $10.22. The quick 16.14% one week price change had me rethink this post. But the work started Monday 5/19 is still worth sharing. It’s useful being prepared with a team of ideas that can be confidently accessed when Mr. Market gets crazy, even now. Stoneridge (NYSE:SRI) was an idea that appeared exceptional with high quality (moat) and good value in this market.
This investing opportunity was partially created by reported results May 8. Less than expected reported results provided a lower price. Stoneridge reported Q1 EPS of 5c, versus the consensus of 11c, revenue for the quarter was $236.4M, consensus $245.94M.


Stoneridge founded in 1965 headquartered in Ohio is a global designer and manufacturer of engineered electrical and electronic components, modules and systems. Companies in the automotive, commercial, agricultural and off highway vehicle industries are consumers of Stoneridge’s products and systems.

Their products and systems are elements in the management of mechanical and electrical systems. Also, vehicle performance is improved with convenience and monitoring emissions control, fuel efficiency, safety and security. In addition Stoneridge has a global reach with 25 locations in 15 countries.  


Famed value investors, Richard Pzena identified Stoneridge's value at higher prices. Additionally,  current valuation is discounted to historical and industry measures. Stock price returns for 1 week 16.14%, 1 month -9.16%, YTD -19.84%.

Auto Parts Industry analysis was for US based 100 million to 1 billion in market capitalization only. 

12 companies as listed in the table. 


My analysis grouped the 11 other auto industry companies and created averages compared to Stoneridge.













You can see above the large discounts to industry peers;SRI versus 11 industry peers was; P/S (.30 vs 1.13) , EV/EBIT(12.50 vs 25.85) , F Score (7 vs 5.45), 5 yr Book value growth rate (19.10 vs 6.85), insider ownership (14.67 vs 6.82), shares short as a percentage of float (2.83 vs 4.86), ROA (2.57 vs -3.50), ROC (16.09 vs -60.51), YTD Price change (-21.57 vs 7.38), EBITDA 5 year growth rate (85.60 vs 9.53).


Below are per share historical valuation comparisons. Notice the TTM improvements in per share values versus 2008 to 2012 for EBITDA, Revenue, Book Value, ROC, GM%, F Score are all improved.

















Value investor Richard Pzena continues to add shares of SRI, 


Pzena Investment Management











Other value institution invested and increasing shares in SRI for the quarter ending 03/31/14 ... GAMCO Small Company Value ,TETON Westwood Mighty Mites AAA, SEGALL BRYANT & HAMILL    

















Balance sheet assets likely on the books below fair market value.

Real estate Owned:

Lexington, Ohio : Manufacturing/Division Office ..  219,612 sqft
Canton, Massachusetts  Manufacturing  ... 132,560 sqft
Warren, Ohio Headquarters...   7,500 sqft
Portland, Indiana  Manufacturing.... 182,000 sqft
Stockholm, Sweden  Sales Office/Warehouse.... 2,013 sqft
Juarez, Mexico  Manufacturing ....183,854 sqft
Chihuahua, Mexico  Manufacturing.... 135,569 sqft
Manaus, Brazil  Manufacturing  ....102,247 sqft
São Paulo, Brazil  Manufacturing/Engineering Office/Division Office....45,467 sqft
Pune, India Manufacturing/Engineering Office/Sales Office....80,000 sqft


Important Financial Metrics: 
                                                                                                            
Market Cap: 288.65M , Enterprise Value:   405.76M
Price/Sales:   0.30 , Price/Book:  1.82
Enterprise Value/Revenue:   0.43 , Enterprise Value/EBITDA: 5.74
Return on Assets: 3.78% , Return on Equity: 6.41%
Revenue:  948.51M , Revenue Per Share:   35.48
Qtrly Revenue Growth:     0.30%
Gross Profit: 226.02M , EBITDA:  70.71M
Total Cash:  48.43M , Total Cash Per Share:  1.72
Total Debt:  205.64M , Current Ratio:    2.11
Book Value Per Share:  5.49
Operating Cash Flow: 28.09M , Free Cash Flow:   11.60M
52-Week Change:   -5.02%
52-Week High :13.63 , 52-Week Low:    8.68
Shares Outstanding:  28.24M , Float:  25.95M
% Held by Insiders: 14.67% , % Held by Institutions:  67.20%
Short % of Float: 2.80%

To summarize possible investing interest;  material valuation discount to industry and history, multiple value investors committed at higher prices, mean reversion candidate,YTD price return of -19.80% versus industry 7.64%, 14% insider ownership, quality company as measured by strong FCF, ROC, improving GM%, growing BV , 19.10% 5 year BV growth  , modest moat, clean capital structure 

No Position in SRI

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