Value Portfolio

Exactech released first-quarter financial results that were hindered by foreign currency effects hurting foreign sales growth (i.e., a strong U.S. dollar), but Exactech’s underlying orthopedic joint replacement business is solid. In addition, the second half of the fiscal year looks strong with several new-product introductions. As CEO David Petty said in the conference call:

“Sales organization transition and improvement activities will begin to deliver positive results in the second half of this year. Additionally, for the second half, major product development projects in hip, knee, and shoulder systems remain on track and we plan to be doing surgeries with all three revision systems this year, which will support second-half revenue growth. We’re also pleased with the fundamentally strong condition of the company related to the balance sheet and cash flows.”

In addition, CFO Jody Phillips emphasized that the company “remains solidly profitable.”

Buying a solidly-profitable company with a strong balance sheet and increasing growth prospects that is trading at a temporarily discounted price sounds like a great idea to me.

Gentex continues to drive earnings as more consumers opt to include its self-dimming mirrors in their cars.  Once considered part of an elite upgrade package, Gentex’s mirrors are finding themselves as an option on mid-priced to lower-priced sedans.  Camry, Subaru and Civic have joined the ranks of swanky BMW models who offer Gentex products.  

Popularity of Homelink, Gentex’s wirelessly controlled garage door opener and Smartbeam, an auto-dimming high beam feature, has added to revenue growth. Gentex grew revenue 10% in the first quarterdespite a 2% decline in worldwide light vehicle production. Part of this is via new contracts with automotive equipment manufacturers who agree to include Gentex’s products as an option. Consumers, who have become accustomed to electronic gadgetry in their cars, are increasingly hungry for driver assist technologies.

The company had $665 million of cash in March, $108 million of which was generated in the first quarter. After subtracting debt, Gentex has $1.37 per share in cash, a number that grows each quarter.  Earnings came in 1 penny better than expected and should equal $1.04 this year.

Harte-Hanks chose the wrong day to release first-quarter financials that were uninspiring. Small-cap stocks in general were pummeled on April 30th on fears of an economic slowdown, and this general pummeling made investor reaction to Harte-Hanks even worse than it would have been. Although earnings per share were the same as last year, operating revenues were down 8.7% and operating income was down a whopping 34.2%. CEO Robert Philpott admitted that “at first glance we’re presenting a challenging set of numbers today,” but then explained that this first impression is deceiving because the poor year-over-year comparison is primarily a timing issue and not indicative of weak business fundamentals. In fact, in the conference call Philpott argues that business is stronger than ever:

• Doubled win rate for new clients attracted to the company. New client wins are important for growth, but there is a longer lead time from contractual commitment to revenue production.
• Earlier and longer-term commitment from existing clients than was the case in 2014; virtually all (90%) of last year’s revenue has already been secured from existing clients for repeated spending in 2015 — and it’s only May!
• A non-recurring 2014 online streaming video project boosted first and second quarter revenues in 2014.
• Divestiture of profitable but non-core businesses in business-to-business (B2B) research reduced revenues and will incur a pre-tax charge.
• “Fundamental weakness” in the sales team for Trillium Software, but once more salespersons are hired, the software division should be able to recapture market share and take advantage of the huge market opportunity that remains undiminished in “big data.”
• Transformational acquisition of 3Q Digital, which fills the last piece of the puzzle necessary for Harte-Hanks to compete for all of a client’s marketing needs:

“Until the point that 3Q joined Harte-Hanks, we had effectively been excluded from client conversations that involved digital execution. That is no longer the case.”

The bottom line of all of these timing issues and transactional charge-offs is that the second quarter doesn’t look any better than the first quarter, but that the third and fourth quarters of 2015 should really shine: “This situation will not reverse until the second half of 2015.”  The one weak spot in Trillium Software is being corrected, not only with added sales staff, but bringing in new marketing blood — the company’s chief marketing officer was forced to resign.

The 19.6% intraday decline in the stock price on April 30th was a complete overreaction by short-term weak shareholders and appears to me to represent a tremendous buying opportunity. The company is confident that its new business wins puts “us in a positive position to achieve our full-year target of growth” despite the non-recurrence of the streaming video contract. Cash flow remains strong and there is no reason to believe that the company’s dividend is in peril, which after the selloff amounts to a huge 5.3% yield. On May 14th, the company declared its normal quarterly dividend.

My takeaway: Anyone who buys now (or holds on) should experience a nice capital gain by the end of the calendar year.

Rayonier Advanced Materials reported first-quarter financials that were down from last year’s Q1, but first-quarter revenues beat analyst estimates and EBITDA guidance for fiscal 2015 was raised to a range of $210-$225 million from the previous range of $200-$220 million:

CEO Paul Boynton said: “We are off to a good start in 2015 driven by our cost reduction and continuous improvement initiatives.” Management raised its 2015 EBITDA guidance to $210 million to $225 million as it expects to achieve annualized cost savings of $40 million.

Various class action lawsuits by The Brisco Law Firm and Pomerantz Law Firm have been filed against Rayonier Advanced Materials alleging that the company failed to disclose material information about its business operations at the time of the June 2014 spinoff. RYAM management says the lawsuit is meritless:

“The Company strongly believes the complaint and its allegations to be baseless and without merit, and will vigorously defend this action.”

These type of nuisance suits arise whenever a stock declines in price and typically don’t amount to anything.

U.S. Ecology announced first-quarter earnings operating income was down 3% to $15 million. Adjusted EBITDA for the quarter was up 34% to $27.2 million. Net earnings came in at $5.9 million, or $0.27 per diluted share, compared to $9.4 million, or $0.43 per diluted share in the first quarter of 2014. Excluding foreign currency impacts, adjusted earnings were $0.35 per share, down from $0.48.

Total revenue was $136.7 million, up from $53.4 million. First quarter revenues include $84.7 million from acquired EQ (Environmental Quality) businesses.

Management reaffirmed its full-year 2015 diluted earnings per share in the range of $1.76 and $1.92, compared to a Thomson Reuters consensus EPS estimate of $1.84 per share excluding business development expenses and foreign currency gains and losses, with Adjusted EBITDA of ranging from $137 million to $143 million. Full-year 2015 revenues are expected in the range of $585 million to $620 million, the mid-range of which is 34% better than in 2014.

W.R. Berkley beat estimates reported earnings for the first-quarter earnings of $118 million, or $0.89 per share compared to $169.6 million or $1.25 per share last year. Costs rose as total expense rose 8% to $1.6 billion due higher loss and loss expenses. Revenues grew 2.2% to $1.74 billion from $1.71 billion.

Operating income came in at $0.80 per share which beat Zack’s estimates but fell 20% from last year due to higher than expected premium growth which increased to bet premiums increased to $1.85 billion from $1.801 billion in 2014. Its insurance segment new premiums rose 6% to $1.2 billion. International insurance premiums rose 2.5% to $231.5 million.

Goldman Sachs upgraded the stock and raised its price target to $51 from $48. 

Werner Enterprises reported first-quarter earnings jumped up 61% to $23.1 million while earnings per diluted share rose 63% to $0.32 per share. Revenues edged up 1% to $495.6 million in the first quarter.

The improved economy along with continued freight demand drove the quarter’s performance.  Although freight volumes were hindered by widespread severe winter weather in the first two months of 2014, conditions improved and the company saw a spike in freight demand in March. Its average revenues per tractor per week rose 5.5% while average revenues per mile rose 3.5% compared to 2014.

Werner’s bottom line benefited hugely from lower fuel prices. Fuel costs fell 42% to $53 million as the average price diesel fuel was $1.30 per gallon lower than the first quarter of 2014 and $0.67 lower than fourth quarter of 2014. So far in April, diesel fuel prices are on average $1.31 per gallon lower than the prior year.

The company expects capital expenditures (CAPEX) of about $275 million to $325 million to reduce the average age of its truck fleet to less than two years.  Management noted that it’s still facing driver recruiting issues due to increased competition and a decreasing pool of candidates.

Weyco Group continues to grow its Bogs boot brand, the all-weather comfort footwear that is key to the company’s turnaround, at solid double digit rates.  In the fourth quarter of 2014, Weyco sold almost 70% more Bogs than the previous year. That blistering pace was due to the brutal winter that swept across most of the U.S. early in the winter season.  

Although first-quarter 2015 growth of Bogs was lower at 20%, increasing demand for the company’s Nunn Bush and Stacy Adams product is percolating and boosting growth.  After growing 5% last year, Stacy Adams’ sales lifted 15% in the first quarter.  Colorful modern driving mocs and slip-ons are appealing to a new set of young urban customers. Department stores are beginning to notice and increase orders.  Nunn Bush, known for its more traditional shiny black shoes, grew sales 5% in the first quarter after declining 4% last year.

Earnings growth continues to accelerate, up 13% for the first quarter versus 10% growth last year.  With sales growth now being generated by several different brands, Weyco has many legs to stand on. Newly introduced Bog’s sandals have enjoyed a warm reception and continued improvements in Nunn Bush and Stacy Adams will help diversify Weyco’s product portfolio.

Momentum Portfolio

Apogee Enterprises.  We’re not sure if trees grow to the sky but, according to Apogee, it certainly looks like buildings do!  As we predicted at the time of our November 2013 recommendation, Apogee has seen a dramatic turnaround in its Architectural Glass segment.  In the fourth quarter, operating income from this segment increased from a miniscule 0.1 million to a robust $4.5 million.  For the year this segment’s operating income increased 326% and management still sees strong growth ahead. Despite this growth, operating margins in this segment were 4.7% for the year, still way below the 9% peak level we mentioned in our original recommendation.

Management expects earnings to grow 40% this year to $2.13.  Although the stock is up almost 70% from our recommendation, it trades at only 25 times 2015 estimates despite its much higher growth rate.  We expect the stock to keep climbing.

EQT Midstream Partners LP announced first-quarter net earnings of $95.3 million, compared to $55 million in the first quarter of 2014. EBITDA (earnings before interest, taxes, depreciation and amortization) of $96.6 million beat the company’s guidance of $82 million to $87 million.

The partnership also posted distributable cash flow (DCF) also came in ahead of expectations at $90 million, generating a solid 1.72x dividend coverage ratio of the $52 million paid out for the quarter.

EQM completed its acquisition of the Northern West Virginia Marcellus Gathering System from its parent company, EQT Corp, during the quarter which contributed about $4.6 million to its EBITDA.

Management raised its adjusted EBITDA guidance and DCF for fiscal 2015 due to the addition of its NWV Gathering assets.  EQM now expects $430 million to $445 million up from a prior guidance range of $330 million to $345 million.  DCF for the full year is now estimated at $375 million to $390 million, up from $280 million to $295 million.

The partnership also announced a new quarterly distribution of $0.61 per share, a 5% increase over the prior quarter and 24% higher than the corresponding quarter in 2014. At an annualized rate of $2.44, the new payout represents a 2.9% yield at its current unit price. During its earnings report, management noted that it will target 20% annual distribution growth through 2017.

Hill-Rom Holdings continues to be a healthy investment.  Our initial recommendation of this stock in September 2013 was based on continued strong hospital spending.  The company’s June 2014 acquisition of Trumpf has allowed it to diversify capital spending into the operating room.  Trumpf provides a portfolio of well established surgical products to Hill-Rom’s book of business.  Hill has been able to leverage its sales force who is already selling into this buyer with surgical tables.  The introduction of innovative products like wound therapy beds and stretchers and transportation equipment for obese patients has helped fuel continued growth of capital equipment to hospitals.

Although the company trimmed 2015 revenue estimates slightly when reporting second quarter results in early May, the impact was due only to foreign exchange movements and will not harm earnings.  After reporting 12% earnings growth for the quarter ending March, estimates for full year growth of 12% seem quite reasonable.  The stock is up 51% from our September 2013 recommendation and continues to look strong and fit. It currently trades at 20 times the 2015 estimate.

VCA Inc. shareholders are certainly wagging their tails.  The veterinary hospital operator continues to impress investors with its consistent earnings growth. After growing earnings 12% for the year ended 2014, management has predicted an increase of 17% in 2015.  VCA’s hybrid model of core growth plus acquisitions is working nicely.

The company’s animal hospital business, which accounts for more than three quarters of revenue and 56% of earnings is gaining steam.  After increasing 7% in 2014, revenue from this division leapt 12% in the first quarter of 2015. As predicted, humans continue to care for their pets like children.  Pet owners religiously bring in pets for annual check ups and often spend thousands of dollars on treatments for medical issues that are now readily diagnosed with improved lab testing.

VCA has been a howling success for Roadrunner Stocks, with the stock up 49% since our April 2014 recommendation.  It trades at 22 times forward earnings, a reasonable level considering its increasing rate of earnings growth.