Fundamental Analysis for *WON*

Discussion in 'Stocks' started by ducati998, Aug 15, 2006.

  1. In the interests of disclosure, I hold.

    Current Price $6.56
    Code WON
    Yield 5.90%
    Market Capitalization $1006.3
    TCI Price Target $17.20 to $23.22
    Investment Sector Entertainment
    P/E Ratio 8.88
    Recommendation Buy

    Industry Statistics

    Market Capitalization: 83B
    Price / Earnings: 35.6
    Price / Book: 5.6
    Net Profit Margin 10.2%
    Price To Free Cash Flow -366.8
    Return on Equity: 10.2%
    Total Debt / Equity: 1.4
    Dividend Yield: 2.6%

    We can surmise from the Industry statistics that the individual business is currently unpopular and underperforming the industry relatively in terms of price multiples being awarded to the shares.


    Westwood One, Inc. supplies radio and television stations with information services and programming. The Company provides traffic reporting services, as well as produces and distributes national news, sports, talk, music and special event programs, in addition to local news, sports, weather, video news and other information programming. Westwood One obtains the commercial airtime it sells to advertisers from radio and television affiliates in exchange for the programming it provides to them. That commercial airtime is sold to local/regional advertisers and to national advertisers. The Company provides local traffic and information broadcast reports in over 95 Metro Survey Area (MSA) markets in the United States. Westwood One is managed by CBS Radio Inc., a wholly owned subsidiary of CBS Corporation.


    The business is leveraged, carrying 42% of the capitalization as long term debt.
    This debt is amply covered within EBIT earnings at 8.5 times interest charges.
    This is important as the returns that will accrue to the investor owe no small part to the use of the senior capital, thus the interest payments must be secure.

    Revenue 544.52M
    Revenue Per Share 6.104
    Qtrly Revenue Growth -9.90%
    Gross Profit 185.55M
    EBITDA 140.73M
    Net Income to Common 67.31M

    Herein lays the problem.
    Revenues have been under pressure and are showing lack of growth. They in fact have been showing only 1.57% compounded growth over the last five years. In Wall St, this is not a good way to be awarded high multiples on your stock.

    Profit Margin 12.36%
    Operating Margin 23.75%

    The margins are however higher than the Industry average and they are consistent and stable, which allows the safe use of a leveraged Capital structure to generate returns for the Equity.

    Net Profits in direct comparison to Revenue growth have been growing at the compounded rate of 14.4% over the last five years. This is a direct consequence of the leveraged Capital structure.


    Total Cash 6.41M
    Total Cash Per Share 0.074
    Total Debt 425.32M
    Total Debt/Equity 0.617
    Current Ratio 1.599
    Book Value Per Share 7.972

    The Balance Sheet is average.
    It would be nicer to see a stronger cash position. The cash position is below strict standards for investment, but only marginally.
    There are no inventories to carry, thus the benefit of doubt in this instance would seem to be acceptable, as in an emergency, a portion of the Receivables could be monetized, thus providing a significant margin of safety to the cash position.


    Operating Cash Flow 78.88M
    Levered Free Cash Flow 155.37M

    Here is where the story lies.
    Capital spending requirements are minimal. The cash is free for acquisitions, or, to be returned as a dividend, the free cash flow being substantial. This dividend can, due to the use of the capital structure grow at the same rate as Net Profits and provide an amortization of capital to the investor.

    In the past, an acquisition was purchased, and has been a successful investment, returning 11.5% on investment to the business. With seemingly a lack of investment opportunity, a cash dividend has been instigated and in the future a share repurchase program may be initiated. This will increase the earnings per share, and increase the multiplier assigned.

    Of course there is always the possibility that Revenues start to grow a little faster than the current growth rate. This would be a very positive outcome, but one that is speculative in nature and cannot be relied upon.


    At the current price of $6.56 I feel that this offers a good opportunity to invest in a business that offers a currently safe, though speculative Capital structure through which the Equity capital benefits from the senior capital.

    The low capital expenditure requirements benefit the common in three ways; it allows expansion via an acquisition which based on past returns would benefit the holders of the common, it offers the potential of a growing dividend, and lastly the possibility of a share repurchase program.

    jog on
  2. And an analysis for NAFC

    Current Price $21.23
    Code NAFC
    Yield 3.50%
    Market Capitalization $701.7
    TCI Price Target $35.00 to 47.37
    Investment Sector Food Wholesale
    P/E Ratio 8.72
    Recommendation Buy

    Market Capitalization: 28B
    Price / Earnings: 18.7
    Price / Book: -20.9
    Net Profit Margin 2.1%
    Price To Free Cash Flow -13.6
    Return on Equity: 16.8%
    Total Debt / Equity: 0.9
    Dividend Yield: 2.3%

    By direct comparison NAFC has a more attractive valuation than the aggregate industry. NAFC is selling at a lower multiplier, higher dividend yield, and equivalent Profit margin as the aggregate industry.


    Nash-Finch Company engages in the distribution and retail of food in the United States. It operates in three segments: Food Distribution, Military Food Distribution, and Retail. The Food Distribution segment sells and distributes various nationally branded and private label grocery products and perishable food products, primarily meat and produce to grocery stores located in 26 states across the United States. It also offers other grocery products and perishable food products under the trademarks Our Family, Fame, and Value Choice. This segment also provides various support services, such as promotional, advertising, and merchandising programs; installation of computerized ordering, receiving, and scanning systems; retail accounting, budgeting, and payroll services; retail equipment procurement assistance; consumer and market research; remodeling and store development services; securing existing grocery stores that are for sale or lease, and acquiring or leasing existing stores for resale or sublease to these customers; and also other Internet services. The Military Food Distribution segment distributes grocery products to the United States military commissaries and exchanges. The Food Retailing segment operates corporate-owned stores, including conventional stores and grocery stores. Its conventional grocery stores offer various grocery products and services, such as fresh meat counters, delicatessens, bakeries, eat-in cafes, pharmacies, dry cleaners, banks, and floral departments. These stores also provide services, such as check cashing, fax services, money wiring, and phone cards. As of December 31, 2005, the company operated 71 conventional supermarkets.


    The capital structure carries long term debt as 52% of the capitalization. This level of leverage always must be examined for the safety of interest payments. As there are also commitments to Operating Leases, we also account for these.
    Interest payments are covered 2.27 times over a five year period, and 3.36 times in the last financial year. This falls below strict investment standards in relation to leverage.


    Costs, as Cost of Goods has been rising, quite substantially. The five year trend is at 3.16%, but year on year we have seen an 18.7% increase. This is substantial, but, explainable across the industry as the Producer Price Index [PPI] has shown alarming increases. To offset this increase in costs, management has controlled costs via Selling General & Administration, reducing their costs by 2%. This has the effect of reducing from $3.09/share the increase of costs to $2.63/share.

    There are no discretionary costs contained within; Cost of Goods, Capital Expenditures, or Selling General & Administration. The ship is running lean currently.
    We can therefore give management a clean bill of health in respect to efficiency.

    The Balance Sheet has based on the 2005 full financial year looked rather low on cash.
    This situation has improved over the last two quarters and has returned to the average. Inventories & Receivables have grown in direct proportion with Revenues and pose no concerns. Collection of receivables has continued to be strong.

    The purchase of an acquisition has accounted for increased Goodwill carried within the Plant Property & Equipment line, and also drives the fall in the profitability of assets, from $9.71/$1.00 of PPE, to, $9.35/$1.00 PPE. As the acquisition is integrated we would look for a return to the higher figure.

    The use of senior capital has offset the increase in Cost of Goods, and kept Net Profits increasing. The increases of senior capital and retained earnings have been dispersed into Capital Expenditures for maintenance, increased Working Capital [Inventories & Receivables] and PPE via additions and acquisitions.

    The increases in costs have been well absorbed without impacting the earnings and margins due to adept management. Revenues are growing organically and with the current acquisition are expected to continue to do so.

    The one serious concern is the vulnerability of the ability of the business to meet interest payments in the event of a serious downturn.
    Costs are possibly near, or at a high point, and have been absorbed well. Should PPI prices fall, and reduce costs, this will flow to the bottom line.
    Due to the inherent stable nature of the business, with additional military contracts, I feel that the business is well placed to weather an economic downturn and is a defensive selection.
    Should this be true, the current interest coverage should provide enough of a margin to protect the senior capital and by definition the junior capital.

    jog on
  3. Just a quick update;


    After Hours: 7.33 0.00 (0.00%)

    Last Trade: 7.33
    Trade Time: Aug 31
    Change: 0.14 (1.87%)
    Prev Close: 7.47
    Open: 7.50
    Bid: N/A
    Ask: N/A
    1y Target Est: 8.00

    Day's Range: 7.25 - 7.55
    52wk Range: 6.43 - 20.77
    Volume: 619,400
    Avg Vol (3m): 1,156,970
    Market Cap: 634.48M
    P/E (ttm): 11.24
    EPS (ttm): 0.65
    Div & Yield: 0.40 (5.40%)


    NASH FINCH CO (NasdaqGS:NAFC) Delayed quote data

    Last Trade: 22.85
    Trade Time: Aug 31
    Change: 0.13 (0.57%)
    Prev Close: 22.72
    Open: 22.98
    Bid: 0.01 x 100
    Ask: 34.53 x 100
    1y Target Est: 28.00

    Day's Range: 22.68 - 23.30
    52wk Range: 18.41 - 43.16
    Volume: 164,577
    Avg Vol (3m): 208,062
    Market Cap: 304.80M
    P/E (ttm): 9.38
    EPS (ttm): 2.44
    Div & Yield: 0.72 (3.20%)

    jog on
  4. And another current possibility;

    Current Price $18.81
    Code CAR
    Yield 23.5%
    Market Capitalization $25226.0 million [adjusted]
    TCI Price Target $207.00 to $282.74
    Investment Car Rentals
    P/E Ratio 2.32
    Recommendation Buy

    Industry Statistics

    Market Capitalization: 21B
    Price / Earnings: 15.8
    Price / Book: 2.9
    Net Profit Margin 6.8%
    Price To Free Cash Flow -6.3
    Return on Equity: 11.9%
    Total Debt / Equity: 1.6
    Dividend Yield: 1.2%

    In a direct comparison;

    Price Ratios Company Industry S&P 500
    Current P/E Ratio 2.8 20.9 21.3
    P/E Ratio 5-Year High NA 40.7 149.6
    P/E Ratio 5-Year Low NA 8.3 13.7
    Price/Sales Ratio 0.11 2.41 2.70
    Price/Book Value 0.18 3.68 5.14
    Price/Cash Flow Ratio 0.70 14.60 15.80

    The value metrics utilized in the ratio analysis between CAR, the Industry and the S&P500, leaves very little requiring explanation.
    The undervaluation in all areas makes this a very interesting proposition

    Profit Margins % Company Industry S&P 500
    Gross Margin 31.1 30.0 36.0
    Pre-Tax Margin 6.0 12.0 19.3
    Net Profit Margin 4.2 10.7 13.4
    5 Yr Gross Margins (5-Year Avg.) 35.4 25.1 35.6
    5Yr Pretax Margin (5-Year Avg.) 10.1 6.9 16.2
    5 Yr Net Profit Margins (5-Year Avg.) 6.7 5.3 10.9

    Over the five year aggregate returns, the security has been on a par with the Industry averages.
    This bodes well for the future, in that, barring total disaster, CAR should continue more or less as it has on aggregate.

    Financial Condition Company Industry S&P 500
    Debt/Equity Ratio 1.49 1.00 1.21
    Current Ratio 1.0 1.3 1.3
    Quick Ratio 1.0 1.0 1.1
    Interest Coverage 4.5 10.1 36.5
    Leverage Ratio 59.8 52.5 28.4
    Book Value/Share 104.75 12.33 17.29

    Interest coverage is lower than a pure investment would require for safety. I suggest however that this could be an attractive speculation. That although the Interest coverage is below investment grade,[ by 0.5] that the discount from Book value is so substantial, [$18.81 purchase price, against $104.00 Book value] that even in the event of a liquidation, there is enough asset value to see the holder of the common through a restructuring, or liquidation.

    Hidden Cash-Flows

    There are hidden cash-flows within Cost of Goods and Selling, General & Administration.
    These cash-flows amount to $1.63 per share, a quite substantial sum. These cash-flows may well have been incurred during the current spin-offs.


    There have been two businesses spun off from the parent company [CAR] in the last month or so.
    This restructuring of the capitalization has resulted in the current situation.
    The result, has been, transparency. The earning power of CAR has become easier to recognize, and thus should generate appreciation in the market after the value has been recognized.
    *Spin-offs in general beat the market
    *Paying attention to parent stocks can be very profitable
    *Pay attention to insider buying of parent stocks
    *Spin-offs can be a prelude to a takeover of the parent [by making the parent more attractive to potential purchasers]

    Operating Leases
    The Operating leases constitute a substantial commitment on the Balance Sheet.
    They are however adjusted into the capitalization and the earning power calculated against the capitalized value.
    The earnings against capitalization are 10.9% currently, and 8.1% over five years.
    This would suggest that they [leases] have value and may in point of fact represent a barrier to entry.

    Common Stock
    At only 7.5% of the capitalization, the common stock is extremely leveraged.
    This has the effect of large swings in both directions. Currently, I feel that the most likely direction is up.
    There could be some extreme volatility, so be warned, this could be a wild ride.

    Dividend & Dividend Yield
    With a 23.5% dividend yield, your purchase price could be amortized in four years, assuming no change in the payout.
    At a 33.2% payout ratio, the dividend should be sustainable.
    Should earnings increase, then the payout may be increased, should earnings fall, and the dividend be reduced, you still have a fair margin of safety.

    Potential Takeover Candidate
    At the current valuations, this stock has to be a takeover candidate.
    There have in point of fact already been rumors to that effect.
    Book Value + premium would be the starting point……. $104.00

    Brand Name
    Avis & Budget are strong brand names and have intangible value.
    How much value is the question, but certainly enough that this is a further justification to a Takeover or Merger offer?

    All in all, this appears to be a gross undervaluation.
    It’s not a perfect stock, debt is high in relation to the common, Interest coverage is marginal and Current assets [Working Capital] is at a ratio of 0.59 to Current Liabilities, thus liquidity could become an issue. Having said that, the plusses that might come to pass make this an extremely attractive speculation.
  5. Quick update;

    WON....$6.65.....................$7.50............ ..................+12.8%
    NAFC...$20.52....................$25.00........... .................+21.8%
    CAR....$18.48....................$19.46........... ..................+5.3%
  6. The forward P/E is 18 as of today. P/S is 1.2. It's not too cheap. And there is no insider buying.
  7. CAR looks dirty cheap on surface. Why investors keep away from it?