With the stock market up 20% since October (MarketGrader Sentiment Index Flashes ‘BUY,’) we thought this would be an appropriate time to highlight some of our best values stocks, available this week to MarketGrader.com guests in our featured Value Honor Roll.
One company in particular that caught our attention this week is Power-One, Inc. (NASD: PWER), a California-based manufacturer of power supplies and equipment used in the communications, semiconductor, health care and industrial sectors. In our view the company’s business segments put it in a strong position to benefit from two ongoing growth trends: the development of alternative sources of energy and the ongoing ‘cloud’ build out. The company manufactures solar and wind inverters, equipment that transforms energy from those two alternative sources into usable electricity. Exposure to this market segment, while promising, brings with it volatility given the nascent state of this industry, its dependence on venture capital and government incentives and the resurgence of the oil and gas industries in the U.S. On the other hand, its lineup of power supplies puts the company in the very real and very profitable position of providing critical equipment to the build up of data centers and the ‘cloud’ as companies from Amazon to Google race furiously to expand their networks.
The stock, currently at $5.15 a share, trades 43% below its 52-week high, mostly as a result of lowered guidance by management in the last quarter of 2011. However, since then, the company had a strong earnings report on February 2nd, beating analyst estimates by 50%. Its fiscal year 2012 consensus estimate is up now to $0.90 per share from $0.76 three months ago, an increase of 18%. And while the company’s revenue fell 27% last quarter from the year earlier period, its overall financial position is very strong. Trailing 12-month revenue is up 89% in three years, when the company was posting full year losses. In the last 12 months it earned $127 million. It is clear that the company is not only growing, but doing so profitably while systematically fortifying its finances. It has been trimming its debt load, which peaked at $110 million in 2008 and is down now to a mere $36 million, accounting for only 8% of total capital. All of it has long term maturities. Power-One generated $178 million of free cash flow in the last 12 months and now has $204 million in cash on hand. Also on a trailing 12-month basis its return on equity was 31% and its return on capital was 40%. The company generates almost $300,000 in revenue and $37,000 in net income per employee, both above the industry average.
The stock trades at a meager 5.5 times trailing earnings and 7.6 times next year’s estimates. It also trades at 0.5 times trailing 12-month sales, a fraction of the 3.5 price-to-sales ratio industry average for its peers in the Electrical Products industry. A few investors seem to be catching on; the stock’s Sentiment score has been climbing rapidly in recent weeks from a December low of 3.8 to its current 6.6 (out of 10.) But long term investors need not hurry as this is still, by our account, a value play. While Power-One has an overall MarketGrader grade of 77.8, when graded from the value perspective (where our system emphasizes value indicators over growth indicators) the overall grade jumps to an impressive 91.8. It is worth mentioning also that 12% of the company’s float is sold short, which, in combination with a small market cap of $630 million could represent unwanted volatility for the more conservative types. Long term, however, the stock looks solid from our vantage point. Please click here for our complete analysis.