Thursday, 10 March 2011 20:06

5 Interesting Mid, Large Cap Growth Companies With Reasonable Valuations

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We can configure the stock screener to find mid and large cap growth companies trading on US exchanges with reasonable valuation multiples. We can start with the following criteria:

Exchange Country
Exchange Traded On
"Over The Counter"
Growth rate- Revenue-3 year
Revenue Change-TTM over TTM
Revenue-trailing 12 month
P/E excluding extraordinary items-TTM

As of 3/7/2011, this produces a list of 145 companies. In other screens we have run, we used EV/EBITDA as the valuation metric of choice rather than P/E. Let's add an additional criteria to pare down our list further:


Now, we are down to 110 companies. The metric we are most interested in is the valuation relative to the companies' growth. So, let's switch our screener results view to "Valuation". This lets us see a table of companies and their valuation metrics.

It is worth noting that a couple categories of companies were overrepresented in the list. The for-profit education space has seen substantial growth in recent years but future performance will likely be challenged by additional regulatory scrutiny following a damning DOE report late last year on poor student loan repayment rates for for-profits (those companies depend heavily on federal aid dollars for revenue). As a result, I did not include any of these companies above despite many of them having attractive risk-reward characteristics. I previously purchased Corinthian Colleges (COCO) stock in the aftermath of the report, when valuations were even more attractive, and continue to maintain my position.

Also overrepresented are ADRs for Chinese companies, which continue to trade at valuation discounts. I am not an expert on China and will leave it to the reader to find bargains among these companies.

Some of the more interesting companies returned by the screen include:

Company Name
eHealth, Inc.
LG Display Co Ltd. (ADR)
Medifast, Inc.
Western Digital Corp.

eHealth, Inc. is an online health insurance portal for consumers that provides a streamlined insurance application process and the ability to compare plans across multiple providers in each state. Whereas Quinstreet (QNST), an online lead generation provider for other verticals like Education and Finance, is trading at an EV/EBITDA of >15x, the health insurance focused eHealth is trading at an EV/EBITDA of ~4.6x. While Quinstreet has higher top line growth at ~29% vs. eHealth's 19%, it still seems like eHealth is trading at a substantial valuation discount. While the uncertainty around health insurance reform may be contributing to this discount, eHealth individual health insurance portal would seem to be well-positioned to benefit from the more robust individual insurance market that reform is likely to produce.

EZCORP, Inc. is an operator of pawn-shops that likely benefitted from the credit crunch triggered by the last recession, as consumers were more willing to look to non-traditional lenders to satisfy their short-term cash needs. In fact, they grew revenue from $457M in 2008 to $597M in 2009 and $733M in 2010 and saw net income nearly double from 2008 to 2010. Their revenue has continued to increase despite the recovery. The company first caught my eye in 2005, when it was trading at a low valuation multiple, and I'm still kicking myself for missing out on a ~9x gain by passing on it at that time.

LG Display Co Ltd. is a South Korean LCD display manufacturer for telivision sets, etc. They are trading at a P/E of ~11 but their revenue in 2008, 2009, and 2010 reflects the significant cyclicality of their market. Even when you consider their very strong balance sheet (and their very low EV/EBITDA ratio of ~2.5x), LCDs just seems like an extremely risky place to play if the recovery runs out of steam. However, if you are convinced the recovery will continue, this could be an interesting company to watch.

Medifast, Inc. is a weight-loss product company. They grew revenue almost 2x and net income almost 4x between 2007 and 2009 and QoQ revenue and net income growth each of the four reported quarters through September 2010. Given this, their ~8x EV/EBITDA valuation seems attractive. Also interesting is that >25% of their float is sold short as of Feb 15th, setting up a potential squeeze.

Western Digital Corp. saw a run up yesterday after it announced that it was buying Hitachi's hard disk unit for $4.3B. In fact, that is just the latest run up as the stock has increased in value from ~$26 at the beginning of September to $34.68 yesterday. Even the pre-acquisition balance sheet and operating performance yields a ~2.4x EV/EBITDA ratio for the business at yesterday's closing price and the >10% run up in price after the acquisition announcement implies the market clearly believes there will be material improvements post-acquisition. While the hard-disk market is cyclical, Western Digital was profitable even in their fiscal year from mid-2008 to mid-2009--the height of the recession. This definitely looks like a company to track and learn more about.

Disclosure: I am long COCO.


Last modified on Thursday, 10 March 2011 20:14
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