Archive for January, 2007

Yellow Sticky: MMM Looks Cheap

January 31, 2007

Summary: This week it was announced that MMM’s fourth-quarter sales beat analyst expectations, but profits did not, and guidance for 2007 was below expectations. The stock fell from the 80 area back into the mid-70s. This world-class blue chip growth stock has now become cheap enough to be considered by value investors. If MMM should become available for less than $70 a share, I think it would be offering extremely attractive total return potential. MMM and its brand name are synonymous with high-quality American consumer goods. The company has achieved success by applying leading-edge technology to the development of innovative new products, such as Scotch tape and Post-it notes, which have become international blockbusters. Over time, the reach of MMM’s products has extended into more arcane areas such as electronics, health care, and security. But in recent years the flow of new blockbusters has dried up, generic substitutes for MMM products have proliferated, and the stock has been a disappointing performer. It has been stuck in a trading range between 66 and 82 for three years now. There is a perception on Wall St. that MMM’s growth is slowing. The shares’ P/E ratio has contracted from 29 in 2002 to the present reading of 16.2. But I think sentiment has become too pessimistic. New blockbuster products are possible at any time: MMM has an army of research scientists who generate many new patents every year. Furthermore, some two-thirds of MMM’s sales now occur outside the U.S. The company has 10 plants open or under construction in China, and they are also constructing plants in Russia, Poland and India. MMM therefore has great potential for participation in the growth of emerging markets, and the shares have value as a hedge against U.S. dollar weakness. Surprisingly, this stock also exhibits a very low 1 and 3-year correlation to most market sectors, and it actually has a strong negative correlation to health care, energy, and utilities, so owning MMM could help dampen portfolio volatility. And if 3M should return to favor on Wall St., even a modestly higher P/E ratio of 20 would imply a share price of 92 based on the low end of the company’s expectations for 2007 earnings.

Description of business from the company’s website: “3M is a $21 billion diversified technology company with leading positions in consumer and office; display and graphics; electronics and telecommunications; health care; industrial and transportation; safety, security and protection services and other businesses. Headquartered in St. Paul, Minnesota, the company has companies in more than 60 countries and serves customers in nearly 200 countries. 3M is one of the 30 stocks that make up the Dow Jones Industrial Average and also is a component of the Standard & Poor’s 500 Index.”

Is the size of firm over 1 billion market capitalization? Yes, 55B.

Price to earnings analysis: is the current P/E ratio below 20? Yes, 16.2.

Has the stock’s performance equaled or exceeded the performance of the S&P? Not quite.

Volatility: Is the stock’s beta less than or equal to 1.00? Yes, .89.

Price to assets analysis: is the P/B ratio below 2.5? No: 5.3

Price to cash flow analysis: is the current P/CF ratio below 20? Yes, 12.9.

Does the stock’s dividend yield exceed the yield of the S&P 500? Yes, 2.46 vs. 2.13.

Dividend growth – does the five year dividend growth rate exceed the S&P’s dividend growth rate? Yes. five year dividend growth rate is 7.7%.

Dividend payout analysis: Is the payout ratio less than 50%? Yes, 38.9%.

Current ratio analysis: Is the current ratio greater than 2.0? No: 1.21.

Debt to equity ratio analysis: Is the total debt to equity ratio less than 1.0? Yes, 0.11.

Interest coverage analysis: Does the interest coverage ratio exceed 3.0? Yes, 70.8.

Earnings stability – has there been positive net income for each of the prior ten years? Yes.

Earnings growth – is net income for the company greater than five years ago, preferably at least 1/3 greater? Yes, more than double.

Is the business simple and understandable? Yes. 3M is best known for Scotch tape, Post-it notes, Scotchgard fabric protectors, and Scotch-Brite cleaning products. Sales outside the US account for two-thirds of 3M’s sales.

Does the business have favorable long term prospects? Yes, as long as MMM keeps its edge in the development of new products.

Are company insiders buying more stock than they are selling? No.

Does the expected annual total return exceed 10%? Yes, perhaps as much as 13.5%.

Does technical analysis reveal a convincing uptrend? No. For the last three years, MMM has been moving sideways in an erratic and unpredictable trading range between 66 and 86.

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Calumet Specialty Products Partners LP (CLMT)

January 30, 2007

Summary: The Calumet Lubricants Co. has been around a long time, but Calumet Specialty Products Partners LP stock (CLMT) has only a year of trading history as a unique entity. The chart looks great. CLMT has been making new 52-weeks highs, and it is easy to see why. The L.P. units are yielding close to 5.5% and the valuation numbers look quite good. This security has been trading with a relatively high correlation to the financial, consumer staples and consumer discretionary sectors, and a relatively low correlation to the energy, technology, and health care sectors. I have some reservations about jumping in because of the lack of long-term financial data, and I anticipate widespread weakness in the stock market, but I would consider buying CLMT after a pullback.

Description of business from the company’s website: “When Calumet was founded in 1916, it was our goal to make the highest quality naphthenic specialty oils available. Since that time, we’ve devoted ourselves to making this goal a reality. The refining of petroleum has come a long way since 1916. There have been many advances—better processing methods, improved equipment and chemical discoveries. Throughout, we’ve stayed at the forefront of technology. Our equipment is modernized and our operations are diverse and efficient. Operating three refineries in Northwest Louisiana and a terminal in Burnham, IL Calumet’s capacity has grown notably in the last decade. But it takes more than high technology to produce an excellent product. Our people are committed to the constant improvement of our products. We do more than just test our oils, we continuously manufacture quality into our products and service. Our quality processes, our dedicated employees, and optimum technologies combine to give our customers the superior products they require and deserve.

Calumet produces a full line of naphthenic and paraffinic oils as well as aliphatic solvents and paraffin and microcrystalline waxes. Our Princeton, Louisiana refinery produces a premium line of Naphthenic Base and Process Oils as well as diverse products such as refrigeration oils, shock absorber oils and electrical insulation oils. Considered our flagship refinery, Princeton provides both truck and rail car service throughout the country.

Acquired in 2001, Calumet’s Shreveport facility is a complete specialty refinery. Shreveport is successful in its ability to produce paraffinic base oils and fully refined paraffin waxes. Shreveport also produces both Naphthenic and Paraffinic Bright Stocks.

Shreveport was a welcomed addition to the Calumet family. Synergies abound as Calumet owns and operates all active refining assets in Northwest Louisiana. The future is bright at Shreveport as many new products are in various levels of development.

A wide range of aliphatic solvents is produced at our Cotton Valley, Louisiana refinery. The product range includes hydrotreated low aromatic solvents and low vapor pressure solvents as well as conventionally refined products. These specialty solvents find applications in a wide variety of markets including paints and coatings, inks, extraction and mining. The product line includes Heptane, Rubber Solvents, VM&P, Mineral Spirits, K-1 and Mineral Seal Oil.

Our Burnham terminal contains a manufacturing and bulk storage facility with the capacity to hold over six million gallons as a terminal for tank truck delivery throughout the upper Midwest. The remainder of the United States is served by railcar, and international transportation is by ship. It’s important to us that you receive your shipment on time and within specifications. We’re not content until you are completely satisfied with the performance of our products, and the performance of our company.”

Is the size of firm over 1 billion market capitalization? Yes, 1.3B.

Price to earnings analysis: is the current P/E ratio below 20? Yes, 14.8.

Has the stock’s performance equaled or exceeded the performance of the S&P? Yes, so far.

Volatility: Is the stock’s beta less than or equal to 1.00? Insufficient data for 3-year beta. Beta is 1.00 per Google Finance.

Price to assets analysis: is the P/B ratio below 2.5? Yes, 1.8.

Price to cash flow analysis: is the current P/CF ratio below 20? Yes, 7.18.

Does the stock’s dividend yield exceed the yield of the S&P 500? Yes, 5.48 vs. 2.13.

Dividend growth – does the five year dividend growth rate exceed the S&P’s dividend growth rate? Insufficient data, but it appears dividend growth will be excellent. The quarterly distribution was just increased to .60 per limited partner unit, up .05 or 9% from the previous payout in November.

Dividend payout analysis: Is the payout ratio less than 50%? Insufficient data. The payout appears reasonable in terms of earnings and free cash flow.

Current ratio analysis: Is the current ratio greater than 2.0? Yes, 2.68.

Debt to equity ratio analysis: Is the total debt to equity ratio less than 1.0? Yes, .15.

Interest coverage analysis: Does the interest coverage ratio exceed 3.0? Yes, 3.41.

Earnings stability – has there been positive net income for each of the prior ten years? Insufficient data. Yes, as to the prior two years.

Earnings growth – is net income for the company greater than five years ago, preferably at least 1/3 greater? Insufficient data. There was a 26% increase from 2004 to 2005.

Is the business simple and understandable? Yes.

Does the business have favorable long term prospects? Yes. The Calumet brand name is not well known to me, but that is not surprising; most of their products are used in industrial processes and by other manufacturers.

Are company insiders buying more stock than they are selling? Yes.

Does the expected annual total return exceed 10%? Yes, it looks like it could be as high as 25%.

Does technical analysis reveal a convincing uptrend? Yes.

Another Indicator is Calling for a Correction

January 29, 2007

I am always on the lookout for valid and reliable leading indicators of impending trend changes in the financial markets, and the NASDAQ/NYSE volume ratio indicator looks like a promising one to follow.

I learned about this indicator in an article by Mark Arbeter in the January 31 issue of the S&P Outlook entitled “Overheated Bulls? A correction could be looming for the S&P 500”. I can not reproduce the article here because of copyright issues, but be sure to read it if you have access to the S&P Outlook.

Here is the gist of the article: Arbeter presents a technical study of NASDAQ and NYSE volume trends which has a good track record for identifying intermediate-term stock market trend change points as much as a month or two before they occur. This indicator is the three week average of the ratio of NASDAQ weekly volume to New York Stock Exchange weekly volume. When NASDAQ volume rises to an extreme high in relation to NYSE volume, it shows that speculation has become excessive and a correction may be imminent. Likewise, when NASDAQ volume falls to an extreme low in relation to NYSE volume, it shows that investors have become afraid to take on risk and a rally may be at hand.

The cutoff points given for identifying extremes for the ratio are 1.40 and 1.10. Only four years of data are presented, but in studying the accompanying chart it is clear that readings below 1.10 for the ratio have coincided with excellent times to buy in 2003, 2004, 2005, and 2006. Ratio readings above 1.40 have tended to precede market peaks during the same years. The ratio identified more buying opportunities than selling opportunities during this period, but there were at least one of each per year. Arbeter’s purpose for presenting the information at this time is that the NASDAQ/NYSE volume ratio indicator exceeded 1.40 and therefore was giving a sell signal at the end of 2006.

I am not a short term trader or a short-seller, so I plan to use this indicator to consider a contrary position when NASDAQ sentiment has become excessively bearish, and turn my attention to NASDAQ growth stocks and high-beta ETFs such as QQQQ, XLK, or FDN. Of course these stocks are normally avoided by value investors, but they do offer portfolio diversification and the potential for extraordinary gains, so it is wise to watch for them to go on sale.

Wisconsin Energy Looking Cheesy

January 27, 2007

Summary: Most of the companies that have been turning up on my cheap stock screens lately deserve to be cheap because of their poor financial strength. Wisconsin Energy (WEC) fits the profile. Although it is true that their cash flow is good, and the interest coverage ratio is a solid 3.69, the current ratio and the debt to equity ratio are unsatisfactory, especially for a company with a history of cutting dividend payments. The current dividend yield of 2.15% is inadequate to compensate investors for the risk of owning a security with this kind of history.

Description of business from the company’s website: Wisconsin Energy’s principal business is providing electric and natural gas service to customers across Wisconsin and the Upper Peninsula of Michigan. Total assets are more than $10 billion. Utility Businesses: We Energies and Edison Sault Electric Company serve more than one million electric customers in Wisconsin and Michigan’s Upper Peninsula and one million natural gas customers in Wisconsin. We Energies is the trade name of Wisconsin Electric Power Company and Wisconsin Gas Company, the company’s utility subsidiaries. Non-Utility Businesses: Non-utility businesses include renewable energy and real estate development.

Is the size of firm over 1 billion market capitalization? Yes, 5.4B.

Price to earnings analysis: is the current P/E ratio below 20? Yes, 16.5.

Has the stock’s performance equaled or exceeded the performance of the S&P? Yes. WEC underperformed from 1997 to 2003, but it has caught up again.

Volatility: Is the stock’s beta less than or equal to 1.00? Yes, .71.

Price to assets analysis: is the P/B ratio below 2.5? Yes, 1.9

Price to cash flow analysis: is the current P/CF ratio below 20? Yes, 8.1.

Does the stock’s dividend yield exceed the yield of the S&P 500? Just barely: 2.15 vs. 2.10.

Dividend growth – does the five year dividend growth rate exceed the S&P’s dividend growth rate? No: -8.47 vs. 1.69. WEC had a history of steadily rising dividend payments until 2000, when financial difficulties resulted in a reduction of the dividend from .39 to .20. Since then the dividend has risen steadily to the present .25.

Dividend payout analysis: Is the payout ratio less than 50%? Yes, 32.66.

Current ratio analysis: Is the current ratio greater than 2.0? No: .63.

Debt to equity ratio analysis: Is the total debt to equity ratio less than 1.0? No: 1.38.

Interest coverage analysis: Does the interest coverage ratio exceed 3.0? Yes: 3.69.

Intrinsic valuation – is the stock selling below its forward intrinsic value? No, unless you assume the earnings growth rate will exceed a constant 7%, and that seems unreasonable for a regulated public utility in an area with moderate population growth and economic expansion.

Earnings stability – has there been positive net income for each of the prior ten years? Yes.

Earnings growth – is net income for the company greater than five years ago, preferably at least 1/3 greater? Yes.

Is the business simple and understandable? Yes.

Does the business have favorable long term prospects? Yes.

Are company insiders buying more stock than they are selling? No.

Does technical analysis reveal a convincing uptrend? Yes.

Avista Corp. (AVA) Appears Overvalued

January 26, 2007

Summary: Avista turned up on one of my screens for cheap stocks. The company sells electricity and natural gas in the Pacific Northwest and also engages in several unregulated businesses, including energy trading. AVA stock does look cheap in terms of its P/E ratio, P/B ratio and cash flow, but here again the company does not meet stringent standards for financial strength. AVA has taken on considerable debt to finance its activities. While cash flow appears adequate to keep everything going, there is not much margin for error. The stock has increased in volatility in recent years and it has underperformed the S&P. The dividend yield appears inadequate to compensate investors for the level of risk. In my opinion AVA is trading at a significant premium to its intrinsic value. The stock price appears to have fully discounted possible positive developments in the future. AVA does not look like an attractive investment at this time.

Description of business from the company’s website: “Avista Corp. (NYSE:AVA), based in Spokane, Wash., is an energy company engaged in the generation, transmission and distribution of energy as well as other energy-related businesses. Its core business, Avista Utilities, is a regulated utility, providing service to 338,000 electric and 297,000 natural gas customers in the economically growing northwestern United States. Avista’s unregulated businesses include Advantage IQ, Avista Energy and Avista Power. Avista’s business strategy emphasizes the safe and reliable provision of energy and energy-related services at a competitive price, helping customers get the most value from their energy dollar and providing investors with a fair return.”

Is the size of firm over 1 billion market capitalization? Yes, 1.22B.

Price to earnings analysis: is the current P/E ratio below 20? Yes, 15.19

Has the stock’s performance equaled or exceeded the performance of the S&P? The company has underperformed with increased volatility since 1998.

Volatility: Is the stock’s beta less than or equal to 1.00? Yes, .92.

Price to assets analysis: is the P/B ratio below 2.5? Yes, 1.48.

Price to cash flow analysis: is the current P/CF ratio below 20? Yes, 7.27.

Does the stock’s dividend yield exceed the yield of the S&P 500? Yes, 2.36 vs. 2.10.

Dividend growth – does the five year dividend growth rate exceed the S&P’s dividend growth rate? Yes, 2.57 vs. 1.69.

Dividend payout analysis: Is the payout ratio less than 50%? Yes, 34.3%.

Current ratio analysis: Is the current ratio greater than 2.0? No: .90.

Debt to equity ratio analysis: Is the total debt to equity ratio less than 1.0? No: 1.46.

Interest coverage analysis: Does the interest coverage ratio exceed 3.0? No: 2.23.

Intrinsic valuation – is the stock selling below its forward intrinsic value? No

Earnings stability – has there been positive net income for each of the prior ten years? Yes, but earnings have been quite variable, and there have been several lean years.

Earnings growth – is net income for the company greater than five years ago, preferably at least 1/3 greater? Yes.

Is the business simple and understandable? Yes.

Does the business have favorable long term prospects? Yes.

Are company insiders buying more stock than they are selling? No.

Does technical analysis reveal a convincing uptrend? Yes.

Central Vermont Public Service (CV) Receives a Grade of D-

January 25, 2007

Description of business from the company’s website: “Central Vermont Public Service [is] an independent, investor-owned company providing energy and energy-related services to customers throughout Vermont. CVPS, the largest of the state’s 21 utilities, serves 155,000 customers across the state. The Home Service Store, an affiliate, operates a national home maintenance and repair service. Subsidiary SmartEnergy is a water-heater rental business. . . . Central Vermont Public Service customers who want to support renewable energy and Vermont dairy farms have a new energy choice – CVPS Cow Power. The Vermont Public Service Board has approved CVPS Cow Power, which is intended to help promote development and reliance on renewable energy in Vermont by creating a market for energy generated by burning methane from cow manure.”

Is the size of firm over 1 billion market capitalization? No: 240M.

Price to earnings analysis: is the current P/E ratio below 20? Yes – 15.16.

Has the stock’s performance equaled or exceeded the performance of the S&P? No.

Volatility: Is the stock’s beta less than or equal to 1.00? Yes – .81.

Price to assets analysis: is the P/B ratio below 2.5? Yes – 1.4.

Price to cash flow analysis: is the current P/CF ratio below 20? Yes – 8.21.

Does the stock’s dividend yield exceed the yield of the S&P 500? Yes – 3.90 vs. 2.02.

Dividend growth – does the five year dividend growth rate exceed the S&P’s dividend growth rate? Yes – 5.50 vs. 5.30.

Dividend payout analysis: Is the payout ratio less than 50%? No: 76.56%.

Current ratio analysis: Is the current ratio greater than 2.0? No: 1.17.

Debt to equity ratio analysis: Is the total debt to equity ratio less than 1.0? Yes – .72.

Interest coverage analysis: Does the interest coverage ratio exceed 3.0? No: 1.60.

Intrinsic valuation – is the stock selling below its forward intrinsic value? No.

Earnings stability – has there been positive net income for each of the prior ten years? Yes, but net income was very poor in 1998, 2001, and 2005.

Earnings growth – is net income for the company greater than five years ago, preferably at least 1/3 greater? Yes, but net income has been so variable that this could be a fluke.

Is the business simple and understandable? Yes.

Does the business have favorable long term prospects? No. The population in CV’s service area is stable at best, and there is a trend to reduced electricity consumption through conservation efforts.

Are company insiders buying more stock than they are selling? No.

Does technical analysis reveal a convincing uptrend? Yes.

SUMMARY: A few electric utilities have started showing up on my daily scans for cheap stocks, including Central Vermont Public Service. There are some positives here. CV has the lowest electricity rates of any major utility in New England, and they are relatively unaffected by energy price fluctuations, because they have long-term power purchase contracts with the Vermont Yankee nuclear plant and the Canadian provincial utility Hydro-Quebec. The company has recently been granted a 4% rate increase. One unique feature of CV is that they sponsor the generation of electricity on several local farms from methane produced by cow manure. But the overall investment picture is not very good. This company has underperformed the S&P 500 badly over the years. CV is small, and it is likely to stay small. The current ratio shows better financial strength than many electric utilities, but the interest coverage ratio is a disconcertingly low 1.60, so they have little margin for error, and the dividend payout ratio is already way too high. This doesn’t seem like a good place to invest money for the long haul. The expected rate of return appears to be less than holding T-Bills, but with much more risk.

Stop Picking Stocks?

January 24, 2007

There is an interesting article on Slate by Henry Blodget entitled, “Stop Picking Stocks—Immediately! Why the world’s greatest stock picker stopped picking stocks, and why you should, too.”

Blodget points out that the market has become much more efficient in the internet era. He contends that stock pickers have the deck stacked against them, and that they would do much better if they bought low-cost index funds and let it go at that.

In support of this thesis, Blodget quotes Benjamin Graham, from a 1976 article in the Journal of Finance:

“I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when [the bible of fundamental stock analysis, Graham and Dodd’s Security Analysis] was first published; but the situation has changed. I doubt whether such extensive efforts will generate sufficiently superior selections to justify their cost.”

Blodget adds that Graham had come to favor a simpler stragegy of screening stocks using simple valuation and fundamental criteria and incorporating them into diversified portfolios.

There is certainly some truth in this. The average small investor can not expect to beat the market, but he or she can easily equal market returns through passive investment in index funds.

But that still leaves the question of which index fund this hypothetical passive investor should choose, and whether additional investments should be made in bond funds, international index funds, and so on. The possibilities are mind-boggling! Stock-picking is replaced by fund-picking. Also, unless he sticks to one index fund, the passive investor must make continuous decisions about sector weighting, reinvestment and rebalancing which can have a profound impact on the bottom line. But the goal of matching the market’s return will still be hard to achieve for various reasons, including investment expenses and transaction fees, and there is no hope of beating the market.

If I were starting out today I would definitely begin with a foundation of carefully chosen low-cost index funds and accumulate shares through dollar cost averaging. But I think that if someone has the time, educational background, and aptitude, and is willing to work hard, it is still possible to supplement the index funds with individual stocks which will provide superior results, boosting overall returns and providing satisfaction which can not be achieved through passive investing.

Value Screen: South Jersey Industries (SJI)

January 23, 2007

Description of Business from Company’s Website:
“South Jersey Industries is an energy services holding company. Subsidiaries include South Jersey Gas, South Jersey Energy Service Plus, South Jersey Energy, Marina Energy, and South Jersey Resources Group.”

Additional information from Yahoo Finance: “South Jersey Industries, Inc., through its wholly owned subsidiaries, engages in the purchase, transmission, and sale of natural gas for residential, commercial, and industrial use. It also sells natural gas and pipeline transportation capacity to various customers on the interstate pipeline system, and transports natural gas purchased directly from producers or suppliers. The company also acquires and markets natural gas and electricity to retail end users and provides energy management services to commercial and industrial customers. It also markets an air quality monitoring system through an environmental consulting firm. The company markets wholesale natural gas storage, commodity, and transportation in the mid-Atlantic and southern states. The company develops and operates energy related projects, which provide cooling, heating, and hot water services. In addition, the company installs residential and small commercial HVAC systems, as well as provides plumbing services in southern New Jersey. As of December 31, 2005, the company served approximately 322,424 residential, commercial, and industrial customers in southern New Jersey. South Jersey Industries was founded in 1910 and is headquartered in Folsom, New Jersey.”

Has the stock’s performance equaled or exceeded the performance of the S&P? Yes.

Is the size of firm over 1 billion market capitalization? Borderline: 950M.

Price to earnings analysis: is the current P/E ratio below 20? Borderline: 19.55.

Volatility: Is the stock’s beta less than or equal to 1.00? Yes – .86.

Price to assets analysis: is the P/B ratio below 2.5? Yes – 2.19.

Price to cash flow analysis: is the current P/CF ratio below 20? Yes – 13.

Does the stock’s dividend yield exceed the yield of the S&P 500? Yes – 3.02% vs. 2.05%.

Dividend growth – does the five year dividend growth rate exceed the S&P’s dividend growth rate? No: 3.33% vs. 7.32%. However, SJI has increased the dividend each of the last eight years, they have just instituted a policy of raising it annually by a base growth level of 6-7%, and the dividend was just increased 9% on December 1.

Dividend payout analysis: Is the payout ratio less than 50%? No: 54.7%.

Current ratio analysis: Is the current ratio greater than 2.0? No: .85.

Debt to equity ratio analysis: Is the total debt ratio less than 1.0? No: 1.24.

Intrinsic valuation – is the stock selling below its forward intrinsic value? Yes, 32.43 vs. approximate intrinsic value of $35.50.

Earnings stability – has there been positive net income for each of the prior ten years? Yes.

Earnings growth – is net income for the company greater than five years ago, preferably at least 1/3 greater? Yes. The average long-term annual growth rate is approaching 10%.

Is the business simple and understandable? Yes.

Does the business have favorable long term prospects? Yes.

Are company insiders buying more stock than they are selling? No. There were a few small purchases in November 06, however, this was preceded by heavy sales in March 06.

Does technical analysis reveal a convincing uptrend? Yes.

SUMMARY: A few natural gas utilities have started showing up on my daily scans. Southern Jersey Industries is a bit more diversified than the others, and also has a higher dividend yield. Some of SJI’s business interests other than gas distribution are electricity marketing, air quality monitoring, plumbing and heating, and energy management services. In a recently announced new venture, they will be installing solar electric systems. This company appears to be reasonably priced from a value perspective. There are a few things I don’t like: the dividend payout ratio is too high, and the company has taken on more debt than I would like. But this is normal for utilities, and I cash flow will probably be more than sufficient to meet all obligations. I would consider buying this stock at a lower price during a market correction.

Value Screen: C&F Financial Corporation (CFFI)

January 22, 2007

C&F Financial Corporation operates as the holding company for C&F Bank, also known as Citizens and Farmers Bank, which provides commercial and retail banking services in Virginia. CFFI operates 16 branch offices in the Hampton – Richmond corridor of Virginia and plans to open two more in 2007. The company provides very little information on their website which is useful to prospective investors. It appears that residential mortgage lending is a substantial portion of their business.

Does the stock’s dividend yield exceed the yield of the S&P 500? Yes – 2.97%.

Is the stock’s beta less than or equal to 1.00? Yes – .23.

Has the stock’s performance equaled or exceeded the performance of the S&P? Yes, by a good margin, and CFFI also behaved inversely to the S$P during the 2000-03 bear market.

Is the size of firm over 1 billion market capitalization? No. CFFI has a market cap of only 132M and the stock is thinly traded.

Price to earnings analysis: is the current P/E ratio below 20? Yes – 11.4.

Price to assets analysis: is the P/B ratio below 2.5? Yes: 1.96.

Current ratio analysis: Is the current ratio greater than 2.0? No: 1.10; also, the ratio has deteriorated from 1.13 in the two preceding years.

Dividend payout analysis: Is the payout ratio less than 50%? Yes: 29%.

Earnings stability – has there been positive net income for the prior ten years? Yes.

Earnings growth – is net income for the company greater than five years ago, preferably at least 1/3 greater? Yes, 50% greater.

Dividend growth – is the dividend greater than five years ago, preferably at least 1/3 greater? Yes. CFFI has increased the dividend annually and it has almost doubled in five years.

Is the business simple and understandable? Yes.

Does the business have favorable long term prospects? Yes.

Are company insiders buying more stock than they are selling? Insiders have made no market purchases or sales for two years.

Does technical analysis reveal a convincing uptrend? No. For the last year, CFFI has traded sideways with an upward bias, in a trading range between 37 and 42.

SUMMARY: CFFI came to my attention through a Forbes article which championed CFFI as a bank stock which famous investors Buffett and Neff might love. Most of the numbers do look good at first glance. However, the company is quite small, and like many small companies, not very transparent when it comes to providing useful information to prospective investors. C&F’s 1.10 current ratio is rather low. Although the ratio is in the same range as many other bank stocks which are considered solvent, the deteriorating trend of the ratio in recent years is a matter of more concern, since it could portend trouble in the future.

Value Screen: FairPoint Communications Inc. (FRP)

January 20, 2007

On January 16, Verizon (VZ) announced it is selling its residential telephone business in Maine, New Hampshire, and Vermont for $2.72 billion. This operation, which serves 1.5 million customers, will be acquired by FairPoint Communications (FRP). FairPoint already owns local phone networks in 31 mostly rural markets in 18 states. The Verizon operations being sold will first be transferred to a newly created unit that will issue $1.7 billion worth of new debt before being sold to FairPoint. Of the $2.72 billion being paid by FairPoint, Verizon will receive $1.7 billion and Verizon shareholders will receive 1 share of FRP stock for each 55 shares of VZ they own. Verizon shareholders will have to decide whether to sell the new FRP shares, keep them, or perhaps buy more. I am applying my value screen to FairPoint, as things stand before completion of the transaction, to facilitate that decision.

Does the stock’s dividend yield exceed the yield of the S&P 500? Yes – the current yield is very high, 8.17%.
Is the stock’s beta less than or equal to 1.00? Insufficient data for three year beta. 1.14 per Yahoo Finance, 1.00 per Google Finance.
Has the stock’s performance equaled or exceeded the performance of the S&P? No.
Is the size of firm over 1 billion market capitalization? No, as things stand now: 672M.
Price to earnings analysis – is the current P/E ratio below 20? Yes, barely; 19.06
Price to assets analysis – is the P/B ratio below 2.5? No – 2.87.
Is the current ratio greater than 2.0? No: 1.37.
Is the dividend payout ratio less than 50%? No – 158%.
Earnings stability – has there been positive net income for the prior ten years? No. The company has lost money in six of the nine years for which data is available.
Earnings growth – is net income for the company greater than five years ago, preferably at least 1/3 greater? Yes, but the earnings history is too erratic to call this a trend.
Dividend growth – is the dividend greater than five years ago, preferably at least 1/3 greater? A dividend of 1.42 was instituted in 2005 and it has recently been increased to 1.59. This appears to be quite a bold move, considering that diluted earnings per share were .91 in 2005 and about 1.01 in 2006.
Is the business simple and understandable? Yes.
Does the business have favorable long term prospects? Not really. VZ is getting out of the landline business because of its low growth potential. FRP claims they can achieve growth by increasing broadband availability in rural areas, but it is hard to visualize FairPoint succeeding since a much larger and better capitalized firm has determined it would not be cost-effective.
Are company insiders buying more stock than they are selling? The CFO bought 20K shares from Nov. 05 to Feb. 06 and the stock has in fact doubled since then. There have been no subsequent purchases or sales.
Does technical analysis reveal a convincing uptrend? FRP has been in an uptrend for about a year.

SUMMARY:
The takeover of Verizon’s northern New England residential telephone business by FairPoint reminds me of one of those public television nature shows where you see a tiny lizard trying to swallow an insect three times its size. FairPoint says it plans to invest $200 million on infrastructure improvements and systems development in this area, with half of that that amount being spent “even before we close the transaction,” according to Gene Johnson, chairman and CEO. Johnson also says he plans to keep all 3000 Verizon employees, add 600 new workers, and significantly increase broadband internet availability in the region within 12 months after the deal closes. I am skeptical that FairPoint has the financial strength to do any of this, and I do not think FairPoint will be well received by regulatory authorities in the service area, not to mention unionized Verizon employees. My conclusion is that owning FRP shares is, at best, a very risky speculation, and I will be looking to sell mine soon after they are issued.