We’re shifting our coverage around a bit to better allocate resources to areas that are of interest to you! We’re dropping coverage of the following companies, but we plan to add different companies and finetune our analysis in other areas. Every day, we seek to make our service as valuable as it can be!
By Christopher Araos
Air Industries Group (AIRI)
Air Industries focuses on flight safety, including landing gear, engine throttle quadrants and other components.
Air Industries makes structural parts for aerospace and defense customers. It focuses on flight safety, including landing gear, engine mounts, throttle quadrants and other components. The company’s products can be found on Sikorski’s UH-60 Blackhawk helicopter, Lockheed’s F-35 Joint Strike Fighter, and Boeing and Airbus commercial planes.
Though public only since 2005, Air Industries has long customer ties. It has made components and subassemblies for defense and commercial aerospace customers for more than 40 years. The firm has also built up a high degree of switching costs with its customers given its ‘flight critical’ components.
Roughly 90% of the company’s sales are tied to the defense markets, and the firm continues to operate at the whim of competing budget priorities. Though geopolitical uncertainty remains, continued reductions in military spending cannot be ruled out. Investors need to pay close attention to any defense budget changes.
As a result of the advanced certifications required to supply critical defense components, Air Industries is the sole source supplier on many of its products. This gives it bargaining power during contract negotiations, helping to support margins. Customer concentration risk is present, however, with two customers accounting for ~36% of sales.
Many of Air Industries’ products are subject to wear and tear. This offers some stability to operations, but it is not uncommon for replacement spending to be deferred for years at times. We’d prefer the company gain more commercial exposure.
Our published fair value estimate range for Air Industries Group is $1-$5 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Unattractive.
Build-A-Bear Workshop (BBW)
Build-A-Bear Workshop is the only global company that offers an interactive make-your-own stuffed animal retail-entertainment experience.
Build-A-Bear Workshop is the only global company that offers an interactive make-your-own stuffed animal retail-entertainment experience. There are more than 400 Build-A-Bear Workshop stores worldwide. Its target customer is 3-12 years old. The company was founded in 1997 and is headquartered in St. Louis, Missouri.
We think Build-A-Bear has a powerful brand, with over 95% recognition level in the US. The firm also has a recurring business model, as loyal guests return again and again (over 60% of business). The gift-giving and collectible segments are also key focus areas.
Build-A-Bear is looking to transition from sustained profitability to profitable growth, but the current retail environment may threaten its plans. Targets for revenue to grow in the mid-single digits and new store openings in different formats and non-traditional locations will likely come under pressure as the firm reacts to the traffic issues and overly promotional environment.
Build-A-Bear hasn’t been able to escape the woes of the broader retail environment. 2016 was a challenging year, highlighted by significant weakness in traffic in the holiday period. Weakness in comparable sales is expected to continue, but margin improvement is expected in 2017 thanks to cost initiatives and lower promotional activity.
Recent results in Europe have taken a turn for the worse for Build-A-Bear. In 2016, for example, comparable same-store sales fell 3.8% in the region after advancing more than 13% in 2015. The company continues to expand internationally.
Our published fair value estimate range for Build A Bear is $8-$14 per share, with a Valuentum Buying Index rating of 7 and an Economic Castle rating of Attractive.
Blackbaud (BLKB)
Blackbaud has significant penetration opportunity within the philanthropic sector, which is a large, stable, and growing market.
Blackbaud offers a full spectrum of cloud-based and on-premise software solutions and related services for organizations of all sizes including: fundraising, eMarketing, social media, advocacy, constituent relationship management, and analytics, among others. The company was founded in 1981 and is headquartered in Charleston, South Carolina.
We like Blackbaud’s large and diverse customer base with a high retention rate, broad suite of applications, and strong financial profile. We think this paves a foundation for future growth and opportunity.
Blackbaud’s business units continue to perform well. We particularly like the pace of recurring revenue growth in both its enterprise and general markets business units. Subscriptions make up over half of total revenue, and more than 75% of total revenue is of the recurring variety. From 2006-2016 subscriptions revenue has advanced at a 45% CAGR, while recurring revenue has grown at a 20% CAGR.
The US nonprofit industry is large and diverse, with roughly 1.6 million organizations registered with the IRS, and the industry is the 3rd largest industry in terms of employees in the US. Blackbaud’s customers use its products and services to help increase donations. Management estimates its total addressable market is $7+ billion in 2017.
Blackbaud has significant penetration opportunity within the philanthropic sector. The firm believes it can take advantage of the large, stable, and growing charitable giving market through data quality offerings, innovative technology, and assistance in building a multi-channel approach.
Our published fair value estimate range for Blackbaud is $54-$90 per share, with a Valuentum Buying Index rating of 4 and an Economic Castle rating of Highest Rated.
=====
Blackbaud’s dividend is stuck in neutral, but the potential for material growth is present. Its yield is far from compelling.
Blackbaud boasts a solid business model, with subscriptions making up over half of its total revenue, and more than 75% of total revenue is of the recurring variety. The firm also has a large and diverse customer base, which should help pave the way for future growth and opportunity. The company has some solid goals for the near future. It expects its 2017 non-GAAP operating margin to be ~20.5%, up from 17.8% in 2014, while free cash flow is expected to be ~$125 million in the year. Annual run rate cash dividend obligations are ~$23 million. Management plans to return ~15% of annual operating cash flow to shareholders via dividends and share repurchases but has displayed a severe lack of willingness to raise the quarterly payout in recent years.
With such a sound, mostly subscription-based business model, a solid growth outlook, strong free cash flow generation, and a balance sheet with relatively minimal debt, we find few negatives weighing on Blackbaud’s dividend growth potential. Its Dividend Cushion ratio is among the best in our coverage universe, but management’s lack of willingness to increase the payout has left its yield unappealing. The firm will remain committed to its disciplined capital strategy, in which it invests ~35% of annual operating cash flow in growth and operating initiatives and uses ~50% of annual operating cash flow to maintain its balance sheet strength. Such a strategy leaves ~15% of capital left for the dividend and share repurchases.
Our published Dividend Cushion ratio for Blackbaud is 9.2 with a Dividend Track Record of Healthy.
China New Borun (BORN)
China New Borun is a leading producer and distributor of corn-based edible alcohol in China. We view it as a speculative entity.
China New Borun is a leading producer and distributor of corn-based edible alcohol in China based on tons of edible alcohol produced. Borun currently owns and operates two facilities, one in Shouguang, Shandong province and the other in Daqing, Heilongjiang province. The company was founded in 2000.
We’re not too fond of China New Borun’s weak cash flow generation and high financial leverage. Although this combination does not guarantee financial problems down the road, it could potentially be a recipe for disaster during tough economic times.
Baijiu is the most popular drink in the Chinese liquor market. The firm sells its corn-based edible alcohol largely to local distilleries of medium to high quality baijiu in Shandong and Heilongjiang Province, where there are a significant number of large and mid-sized local baijiu distilleries.
Baijiu has received a benefit from the falling price of corn recently. The firm expects corn prices to continue to decrease in the near term, providing it with a material boost to its gross margin. The company also sells crude corn oil, so falling corn prices provide it a higher ‘cracking margin’ as well.
We continue to expect top-line pressure in the near term, and profits can be quite volatile. We view China New Borun as merely a speculative play for a risk-seeking investor comfortable with losing their entire investment.
Our published fair value estimate range for China New Borun is $1-$5 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Unattractive.
Compania Cervecerias (CCU)
Compania Cervecerias will benefit from high growth in per capita consumption, population, and GDP in the markets it serves.
Compania Cervecerias is a Chile-based company that produces and distributes beverages in Chile, Argentina, the Cayman Islands and Liechtenstein. The company’s products include non-alcoholic drinks, beer, spirits, cider and wines. It was founded in 1850 and is based in Santiago, Chile.
Compania Cervecerias’ diverse product portfolio includes proprietary, licensed and imported brands and agreements and/or joint ventures with Heineken, AB-Inbev, Pepsi, Paulaner, Schweppes, Guinness, and Pernod Ricard, among others.
CCU’s plan for 2016-2018 is focused on growing its top-line while simultaneously increasing operating efficiencies. The firm will benefit from lower raw material costs for inputs such as sugar in the near term, which will help it offset the negative impact from material currency headwinds in South America. EBITDA margin expansion has been solid of late.
CCU will benefit from high growth in per capita consumption, population, and GDP in the markets it serves. In multiple South American countries, for example, liters per capita growth has been in the mid-single-digit per annum range compared to a decline in the US.
Not only are CCU’s strongest markets growing in liters per capita at a higher rate than the US, their economies are growing much faster. 5 of its top-6 South American markets have GDP growth in the last decade between 3.8%-4.8%.
Our published fair value estimate range for Compania Cervecerias is $17-$29 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Attractive.
Canadian Natural (CNQ)
Canadian Natural has one of the largest reserve bases in its peer group and a vast and diverse asset portfolio, but risks related to fluctuating commodity prices should not be ignored.
Canadian Natural is one of the largest independent crude oil and natural gas producers in the world. The firm is the second-largest independent natural gas producer in Canada, the largest heavy oil producer in Canada, and boasts a tremendous opportunity for oil sands mining. It is based in Calgary and was founded in 1973.
After increasing capital spending in a meaningful way in 2017, management plans to pare back capex in 2018. However, it also expects production in the year to grow 17% over 2017 levels. It also lists an internal target of $2.3-$2.7 billion in free cash flow after dividends.
Canadian Natural’s fundamental performance had been great. Product sales, cash flow from operations, and earnings were all at multi-year highs, but suppressed crude oil prices did away with such performance. 2016 was another tough year, but OPEC has since taken to the negotiating table. North American independent production growth has limited the effect of the deals, however.
Canadian Natural has one of the largest reserve bases in its peer group and a vast and diverse asset portfolio capable of generating significant operating cash flow. Its traditionally solid cash flow generation facilitates further resource development, increased dividends, share buybacks, strategic acquisitions and debt reduction.
Canadian Natural has been paying dividends since April 2001. The company continues to regularly increase its payout, and we fully expect this to continue. The risks related to fluctuating commodity prices should not be ignored, however.
Our published fair value estimate range for Canadian Natural is $24-$36 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Neutral.
=====
Canadian Natural has been paying dividends since April 2001 in Canadian dollars, making the payout to US shareholders subject to currency exchange rates.
Canadian Natural is tied to the highly cyclical crude oil market, but the company has one of the largest reserve bases in its peer group. To combat the fall of operating cash flow due to the challenging environment for oil and gas, Canadian Natural reduced capital spending to ~C$3.8 billion in 2016 from C$11.4 billion in 2014 in order to prop up cash flow. It expects 2017 and 2018 capex to be C$4.855 billion and C$4.335 billion, respectively. With a consistent dividend track record (payout in Canadian dollars) since fiscal 2003, Canadian Natural’s dividend prospects may appear to be more stable than some of its peers. Nevertheless, we have our fair share of concerns with the safety of the payout based on its Dividend Cushion ratio.
The most substantial risk to Canadian Natural’s dividend is volatile commodity prices, which significantly reduced the firm’s recent drilling programs for both crude oil and natural gas. Cash flow from operations have been pressured ($9.6 billion in fiscal 2014 to $3.5 in fiscal 2016), even with a significant reduction in operating costs. Total debt has also increased (from C$14 billion in fiscal 2014 to C$16.8 billion at the end of fiscal 2016). Though the firm has strong historical free cash flow generation and a solid dividend track record, we aren’t convinced of the safety of Canadian Natural’s dividend due to its high debt load and volatile operating environment.
Our published Dividend Cushion ratio for Canadian Natural is 0.2 with a Dividend Track Record of Healthy.
Charles & Colvard (CTHR)
Categories Member Articles