Value Portfolio

Gentex Corp (Nasdaq: GNTX) isn’t looking in the rear view mirror.  The manufacturer of auto-dimming automotive mirrors is adding new features to its popular products.  The company has built a solid business selling rear view mirrors that manage the glare of high beams, display speed and direction and announce lane changes in the exterior side mirrors.

However the company is not sitting still.  It is adding new drivers’ assist features to its lineup.  Lane departure warning, forward collision warning and pedestrian detection are being incorporated to Gentex’s products.  A camera on a chip combined with algorithmic decision making software is integrated into its mirrors to offer this amazing functionality.  In the era of the “driver-less” car, Gentex is keeping up with the competition.

The company reported better-than-expected revenues in the second quarter due to new vehicle launches and higher sales of its existing product portfolio. Revenues rose 12% to $379 million, beating analysts’ estimates of $376 million. Gentex’s automotive sales rose 12% to $370.5 million due to an 11% increase in sales from its auto dimming mirror segment. Management expects a light vehicle production to rise 1% to about 51.27 million units in 2015 prompting management to raise its 2015 revenue guidance from $1.47 billion to $1.52 billion, to a range of $1.52 billion to $1.55 billion. 

At the end of the quarter, Gentex had $570 million cash on its balance sheet, up 15% from last year. It also paid down $3.65 million in debt bringing its total debt to $254.4 million. This has led some to speculate that the company looking to make acquisitions.

Gentex has been incorporating Mobileye (Nasdaq: MBLY) driver-assist technology into these new mirrors.  In the second quarter, some measures of corporate profitability dropped as it accounted for the additional cost of paying Mobileye for these components.

However, management believes profitability will improve as the company works to lower costs in other areas.  Investors should note that Gentex sports some of the highest margins in its industry. Its operating profit margin, a measure of profits after deducting operating expenses, was almost 30%, more than twice the same margin at other automotive suppliers!

While Gentex’s earnings might be cramped for a bit as they work through these higher cost components, adding revolutionary new products is the best move for a growth company.  Management has been able to consistently grow earnings and cash flow and will likely resume to higher profit growth in the near future.  

Although the stock trades at a PE slightly higher than its expected growth rate, it offers a 2% dividend yield as investors wait out this transition period. Gentex is up 74% since being added to our Roadrunner Value Portfolio in January 2013 and is trading below our $20 limit price.

Gulf Island Fabrication reported second-quarter net income of $1.4 million, or $0.09 per diluted share compared to $4.3 million or $0.30 per diluted share in 2014. Revenues fell to $84.3 million, down from $129.2 million in 2014 as the company continues to face lower production as oil companies reduce fabrication spending due to weak oil prices.

With oil prices expected to stay depressed for the remainder of 2015, GIFI’s management says that it will emphasize strong cash management to continue to adequately cover its dividend. It also reported that its Board also authorized a $10 million share repurchase plan through July 2017.

NMI Holdings’ second-quarter net loss narrowed to $10.4 million, or $0.18 per share compared to a loss of $12.9 million, or $0.22 per share in the same quarter in 2014.

However, NMI’s saw business saw tremendous expansion as new insurance written (NIW) for the quarter jumped 50% to $2.5 billion with its “flow” NIW up 69% to $1.9 billion.

CEO Bradley Shuster was very positive about the company’s future:

In the second quarter, we drove significant growth in new insurance written (NIW).  This is primarily attributable to strength in our flow business, which grew 69% over the prior quarter, driven by significant gains with customers who delivered NIW in 2014, contributions from new customers added in 2015, and a stronger than expected origination market.  We believe our rapid growth reflects customers’ favorable response to our differentiated value proposition as well as solid execution by our team.

Immediately following the earnings release, shares spiked 6.3% to $8.24. Despite missing analysts’ EPS loss estimates of a $0.15 by three cents, analysts were mostly upbeat about NMIH’s second-quarter performance.

On August 5th, hedge fund Hayman Capital Management filed notification that it had increased its stake in NMI by 25% to 7.37 million shares. JMP Securities upgraded its rating to “outperform” from “market perform”. NMI Holdings was also upgraded by Zacks to a “buy” from a “hold” rating. Analysts at Keefe, Bruyette & Woods raised their buy target to $10 from $9.50.

Sanderson Farms reported third-quarter revenues came in at $739.9 million, down from $768.4 million last year. Net income fell 33.1% to $50.9 million or $2.27 per share compared to the same period in 2014.

Consumer demand for chicken at US grocery stores remains strong, reflected in whole-bird prices at record levels. However, most retail chicken-part prices fell significantly due to a domestic supply glut caused by lower export demand in reaction to the recent bird flu scare in the US.

The company says production at its new plant in Palestine Texas is running at 50% capacity and is expected to run at full capacity by the second quarter of 2016.

Value investors are seeing beyond the current reality to a much-brighter future, with several recent positive articles on the stock:

1. Beaten, Battered, But Not Fried
2. Don’t Be Chicken Buying Sanderson Farms
3. Long-Term Winner
4. Creating Value
5. Fears are Overblown

US Ecology reported a strong second quarter as total revenues more than doubled to $139.7 million, compared to $66 million in 2014. The huge revenue increase was partly due to its acquisition of EQ Holdings in June 2014, whose revenues were fully reflected in US Ecology’s Q2 2015 financial results compared to only partial reflection in Q2 2014.

Net income for the quarter was $2.1 million, or $0.10 per diluted share, compared to $6.9 million, or $0.32 per diluted share due to a non-cash goodwill impairment charge of $6.7 million, or $0.31 per diluted share related to its divestment of its Allstate Power-Vac business, which was the non-core part of EQ Holdings that it didn’t want to keep.

CEO Jeff Feeler  said:

Divesting Allstate will allow us to concentrate on growing our core environmental services business while continuing to expand our complementary field services. We believe the Allstate transaction is an excellent outcome for all affected employees, customers and stockholders.

Allstate represented about $30.9 million of the company’s Field and Industrial Services segments’ $93.8 million in annual revenues. Allstate’s sale is expected to generate $58 million in cash which will be used to reduce debt. The deal will also be accretive to diluted EPS from continuing operations.

Operating income for the second quarter of 2015 was $12.1 million, up from $11 million last year. Excluding the cash impairment, operating income rose 70% to $18.8 million.

The company expects business to improve in the latter half of 2015 and forecasts EPS in the higher range of its previously-issued EPS guidance of $1.76 to $1.92 while stating that it expects the Allstate divestiture to be accretive to diluted earnings per share from continuing operations.

Last month’s addition, Weis Markets reported second-quarter earnings per share rose 27.1% to $0.61. Revenues for the quarter rose 3.8% to $718.4 million, beating analysts’ estimates of $691.9 million. Comparable store sales were up a 4.3%.

On September 10th, director Dennis Hatchell purchased 2,500 shares of WMK at an average price of $43.08 per share. This marked the first insider purchase in more than six years.

Vishay Precision Group (NYSE: VPG) has experienced a tough year with declining revenue and earnings caused by foreign currency effects, as well as an accounting scare at its Indian subsidiary that forced a delay in filing its 10-K. Fortunately, a subsequent accounting review found no material misstatements at the Indian subsidiary, but the strong U.S. dollar is severely damaging to the company’s 62% exposure to Asian and European markets (slide no. 11). Industrial test equipment is highly cyclical, so volatile financial results are to be expected. The good news is that nothing is fundamentally wrong with the company and strong growth should return once economies in Asia and Europe improve.

In the meantime while waiting for the global economic recovery, the company has expaMnded its share repurchase program to 2 million shares and a hedge fund called Nokomis Capital has been quietly but steadily buying up VPG shares, first disclosing in May a 10.1% ownership stake and continuing to buy into September. Nokomis manager Brett Hendrickson clearly has “confidence and optimism in the future of the company,” but it is unclear if he intends to become an activist shareholder or remain passive.

Momentum Portfolio

Investors worried about a slight decline in the order backlog at Apogee Enterprises (Nasdaq: APOG) need not fret. A recent story in the Wall Street Journal highlights the booming demand for the skyscraper glass that Apogee manufactures.

Commercial construction is growing at its fastest pace in recent history. Unfortunately, capacity for “floating glass”, the glass on the exterior of office and apartment buildings, has shrunk considerably. During the economic downturn 11 out of 47 North American float-glass manufacturing plants were shut down between 2007 and 2014. Due to the complicated fabrication process, these plants are not easily re-started. An idle plant would take months to get ready for production.

Apogee, an expert in architectural glass production, was wise enough to be one of the few producers adding capacity. The company recently opened a startup facility in Utah which helped it lower order to shipment times from 20 weeks to 8 weeks.

Investors who had become comfortable with the company reporting quarterly revenues that consistently beat analyst estimates, sent Apogee’s stock down 5.1% after the company reported second-quarter revenues which missed estimates. Full-year revenue guidance was also cut to single-digit growth as construction delays by customers “are shifting some work from fiscal 2016 to fiscal 2017.” On the positive side, the company’s earnings beat estimates and the order backlog increased sequentially from the first quarter.

CEO Joe Puishys attempted to ameliorate any concern by assuring investors: “Given the high level of backlog currently scheduled for fiscal 2017 and beyond, our visibility one year out is stronger than it has ever been.” Clearly, builders are hungry for more of the glass Apogee is making.

“Nowadays, the glass guys are dictating the timetables of a project to us, instead of the other way around,” said Ralph Esposito, who oversees commercial construction by the New York office of Lend Lease Corp., one of the country’s largest building contractors, with nearly 30 high-rise towers under way.

Based on the comment above, we think Apogee’s revenue and earnings numbers will continue to grow nicely. We still love this stock, which is up 56% since its addition to the Roadrunner Momentum Portfolio. Despite this huge run, the stock trades for a PE of 19 based on 2017 earnings, despite expected growth of 32%.

Even Ambarella’s (Nasdaq: AMBA) sharp-shooting camera chips couldn’t have foreseen the draconian drop in its stock price based on its recent earnings.  The chip-based camera company reported revenue for the second quarter that beat analysts’ estimates, an event typically greeted with stacks of buy orders. Instead the stock was slammed down almost 20% to $75.

Momentum stocks are highly volatile, both up and down, and typically have high betas (greater than the S&P 500’s beta of 1.0), so it is not surprising that Ambarella has declined alongside the S&P 500’s decline. Ambarella’s beta is higher than 1.0. As an analyst recently wrote:

“The stock was flying high on momentum, but a broader market sell-off hammered shares hard as investors fled risky, high-beta equities. AMBA did not drop due to any business challenges or changes in the fundamental bull thesis; the stock dropped because U.S. equities sold off over macro fears. With this in mind, investors should not be timid to buy on this dip.”

The company, whose chip-based cameras are used in drones, home security products and wearable cameras, has enjoyed escalating growth rates over the past six quarters. Therein lies the problem.  Despite reporting a remarkable 79% revenue growth rate, investors chose to focus on guidance for the next quarter which assumes “only” 40% growth.

At issue is the timing of certain product releases. Ambarella’s chips are used by GoPro in their wearable cameras.  Some, but certainly not all, of Ambarella’s magnified growth has occurred due to the continually-evolving product line of GoPro (Nasdaq: GPRO). As GoPro stocks the shelves of its customers with each new model, Ambarella enjoys a boost in orders.

As would make sense, GoPro typically releases new products in the fourth quarter to coincide with holiday shopping.  This means that Ambarella sees a boost to third quarter revenue, as GoPro’s manufacturers begin to assemble product for delivery the next quarter.

This year GoPro shifted its product release schedule. It released the Hero4, their newest, lightest wearable camera and the Hero+LCD in July of this year which boosted second quarter revenue. This partly explains guidance for the second half of the year which predicts only 14% earnings growth. The company has $7 per share in cash and continues to gain traction with other customers like Nest, who has incorporated its chip based camera into its home security products. As Ambarella cycles through this shift in order patterns, higher growth should resume.

“In July, it acquired privately-held VisLabs for $30 million. The Italian company is stocked with PhDs who are developing computer vision and intelligent control systems for automotive and other commercial applications, including autonomous vehicle driving systems. 10% of its revenue is also coming from cameras on drones, which creates another possible opportunity.”

While Ambarella’s stock may take a bit to settle down, it is certainly a better bargain now than it was before earnings. In fact, the stock is cheap based on its 29 P/E ratio and 54% projected annual growth rate. Anytime the P/E-to-growth (PEG) ratio is under 1.0, good things tend to happen to the stock price in the future.

I’m really excited about Ambarella’s growth potential in adding high-quality video to drones. The “killer app” for drones is aerial photography and videography, which is exactly Ambarella’s expertise.

Second-quarter earnings, reported on September 2nd, were $0.27 per share, seven cents better than expected. In addition management raised estimates for the year from $2.71 to $2.83, a number that represents impressive 26% growth.

G-III’s recipe for focusing on fashion forward women’s wear continues to spew out winners.  The company’s dress business has been growing remarkably fast.  Management commented that Vince Camuto and Eliza J, two of its most popular dress labels, are growing faster than 50%.

The company’s recently signed joint venture with Karl Lagerfeld will allow it to capitalize on this iconic designer’s name. On the conference call, CEO Morris Goldfarb gushed enthusiasm regarding this new line:

We are confident that the Lagerfeld brand can support a wide array of businesses. We believe the total brand opportunity conservatively is well in excess of $0.5 billion. We are moving quickly and have already begun marketing and selling dresses, sportswear and handbags, which should be in the stores by the end of fourth quarter.

G-III is up 34% year to date and currently sells at 21 times 2017 estimates, a discount to its growth rate.  We still think investors can dress up their portfolios with G-III.

Hill-Rom Holdings (NYSE: HRC) continues to improve its financial health with weighty acquisitions.  The purveyor of hospital beds and equipment was added to our Small Cap Momentum Portfolio on 09.03.13 and has already delivered an enviable 58% gain. Yet the company’s recent $2 billion acquisition of Welch Allynshould help move the stock higher.  

Hill-Rom, known primarily for its hospital beds, furniture and stretchers, has a history of peppering long term growth with acquisitions. Since 2010 the company has made 6 acquisitions, including Welch-Allyn.  In 2014 it purchased Trumpf Medical which helped it expand into operating room and surgical equipment.  

Yet in the day of hospital consolidation, customers are getting bigger and more frugal.  Big ticket durable medical equipment like beds are being used for longer periods of time and being replaced less frequently.  Even the Trumpf acquisition, while adding a new product line, did little to move Hill-Rom away from the cyclical buying pattern of its customers.

Welch-Allyn, whose product portfolio spans vital sign readers, otoscopes, stethoscopes and blood pressure cuffs, enjoys more recurring sales from its customers.  These diagnostic tools need to be replaced more frequently and require less budgetary approval than a $4,000 ergonomic hospital stretcher.

Welch-Allyn is Hill-Rom’s largest acquisition by far: $2 billion versus the $250 million spent on Trumpf in 2014 and the second largest $400 million for Aspen in 2012.  The deal will be partly funded with debt and partly via newly issued stock.  Welch-Allyn is expected to generate $2.6 billion in sales, more than doubling the $1.9 billion in sales expected for a standalone Hill-Rom in 2015.

This transformative acquisition will catapult Hill-Rom into a premier supplier for hospital chains and physicians’ practices.  Large mergers often carry some integration risk but with two healthy companies joining forces, Hill-Rom will likely come out even more fit than before.

Multi-Color Corp. (Nasdaq: LABL) announced it acquired a 90% controlling interest in Malaysia-based Super Enterprise Holdings Berhad (Super Label) with plans to acquire the remaining interest and delist the  company from the Malaysian stock exchange.

CEO Nigel Vinecombe said:

This acquisition gives Multi-Color Corp. an established footprint in key Southeastern Asian markets with strong organic growth potential with regional and global brand owners.

On August 10th, the company announced net revenues rose 7% to $217.9 million driven by contributions from recent acquisitions and organic growth in Asia and South America, offset by negative foreign currency impacts. Earnings per share rose 12% to $0.91, which blew away analyst estimates. In reaction to the earnings beat, BMO Capital Markets raised its price target on LABL to $75 per share.

OmniVision Technologies (Nasdaq: OVTI) reported a strong first quarter on August 27^th. As expected, revenue dropped but was $3 million higher than anticipated. Earnings were $0.46 per share, seven cents better than expected.

Management lowered guidance for the following quarter, warning that volatility in China would hurt earnings. The weakness in China is partly due to the devaluation of the Yuan and partly due to the success of Apple’s iPhone, which competes with the phones that OmniVision’s customers sell. Mobile products still represent 65% of OmniVision’s revenue, leaving it vulnerable to weakness in this market.

However, CEO Shaw Hong remained upbeat regarding uses for OmniVision’s chips in automotive applications. On the conference call, Hong noted:

For the automotive market, our automotive business continues to grow at a very fast pace. It actually surpassed entertainment and notebook last quarter in terms of revenue contribution. We are reaping benefits from our design-win pipeline that we built up a few years back and are shipping at very healthy volumes to various applications designed for driver assistance. We are now extending our design-win pipeline with machine-vision based applications, such as land departures and road-sign recognition.

The stock continues to trade at a discount to the outstanding $29.75 all-cash bid by Hua Management. The company sold off its equity interest in two companies in an attempt to gain clearance approval from Taiwanese authorities but that group plus the Republic of China and the Committee of Foreign Investment in the United States still need to approve the deal.

Although OmniVision’s stock may be in a stand still until more news is released regarding deal approval, current estimates look reasonable and the company still holds $11.00 per share in cash.