Teledyne Technologies: Recent Weakness Creates Entry Opportunity

Teledyne Technologies (NYSE: TDY) is an industrial technology company producing niche technology products for a variety of industries including healthcare, aerospace, energy and natural resources. Over the past year, the company's shares are down over 14% but I believe this creates an interesting opportunity to get into a quality small-cap name. 

The company has a very stable portfolio of diverse clients, as over a quarter of the company's revenue comes from the U.S. Federal Gov't. Moreover, the company operates in industrial technology markets going through complete refresh cycles, as instrumentation and emission monitoring systems markets are expected to compound at 10.4% CAGR over the next 5 years, while the portable analytic instrumentation market is expected to grow by over 17% through 2020. On current conservative estimates, the company is expected to grow at high single digits and has an excellent track record of providing significant returns on invested capital: over the past decade, gross margins have grown from 28% to over 37%, book value per share has tripled, while free cash flow has more than tripled. ROE and ROIC are at a healthy 14.13% and 9.02% respectively while cash flow as a percentage of sales is over 7%. What is interesting though is that the company is going through a transformation as it has seen an increase in its retained earnings over the last 5 quarters by 12.8% while cash and equivalents have been increasing over the last 3 quarters by 50%.

There are some headwinds for the company including the drag on energy and oil and gas markets which have destabilized energy spending. Energy infrastructure has typically accounted for a quarter of TDY's revenues and the company understands it is a key vertical in its instrumentation segment. It is unclear when the price of oil will continue to rally or drop below $40 a barrel, but uncertainty in the energy markets may distort short term earnings for the company leading to further downside. However, for the patient and long-term investor, TDY's long-term stewardship and timely acquisitions will allow it to hit double digit CAGR for years to come. 

DISCLOSURE: Logos LP is LONG TDY

Rocky Mountain Dealerships: Opportunity In Farming

Rocky Mountain Dealerships (TSE: RME) is a small-cap Canadian company operating in Western Canada within the used agricultural equipment market. The company is trading below 2009 levels and has been in a depressed state given the collapse of energy hurting agricultural spending across Western Canada. However, I believe there is an interesting opportunity in this name considering the long-term fundamentals. By any measure, the company is very cheap: 0.7 price to book ratio, 0.1 price to sales ratio, 3.3 price to free cash flow and forward price to earnings at 7.7. On other valuation metrics, the company seems even more undervalued: the company has a projected FCF-based value of $8.65, enterprise value of $147M (vs. $122 market cap) and pays over 7% yield despite only having a 78% payout ratio.

What is interesting about this company is that they are growing in many key segments despite seeing slight declines in their overall business. Total revenues increased 1.0% last year with used equipment sales up 24% to $377 million despite weaker overall demand and earnings and gross margin declines. Although the market has slightly rebounded, the company is allocating capital in a difficult agricultural environment by building new facilities, making acquisitions (Chabot Implements enhanced their sales footprint in Manitoba) and investing in new markets such as geomatics and agrimatics technologies which aim to make farmers more productive and efficient (through their acquisition of NGF Geomatics)

Will Rocky Mountain Dealerships turn the corner?

Although the company has been through a rough patch and is making the right moves, a lot more work needs to be done in order to enhance performance. Although the company has a decent return on invested capital (~11%), the company needs to enhance its gross and operating margins in order to increase cash flows while continuing to diversify its portfolio in new innovations within the agricultural space. This certainly requires a (very) long-term mindset but management will have to execute, be creative and contrarian while navigating a cyclical environment. The company has very little debt (debt to assets is 0.08), and with retained earnings growing every quarter, the company should be in a position to outperform over the long-term. 

DISCLOSURE: Logos LP is long RME

Dorman: The Little Automotive Parts Supplier That Could

Looking for stable growth in a difficult market? Look to high quality small caps under $2 billion in market cap like 24% founding family owned Dorman Products (NASDAQ: DORM). This supplier of replacement parts and fasteners for light trucks, heavy duty trucks, and passenger cars in the automotive aftermarket is an excellent business whose product portfolio focuses on ‘niche’ offerings as the dominant aftermarket supplier of formerly ‘dealer only’ parts. The company has successfully grown sales year over year for over a decade and has been able to generate a 5 year net income CAGR of 14%. Net sales have been growing at a 5 year CAGR of 13% (all organic) and EPS has been growing at a 5 year CAGR of 14%. Gross margins and operating margins have remained steady at around 38% and 20% respectively.

Unsurprisingly, this company creates significant value with a solid 21.44% ROIC over a WACC of around 9.5%. ROE sits over 18% and the company has an incredibly strong and liquid balance sheet with no debt and a current ratio around 5.69. Free cash flow as a percent of sales has remained consistent for the last 8 years and the company’s free cash flow margin has averaged around 4.7% over the last 3 years which suggests strong cash flow generation.

As for price, although Dorman is currently trading at a P/E of around 20 vs. an industry average of 12, an earnings based DCF with a 14% growth rate decreasing to 7.5% over an 8 year period, a terminal growth rate of 3.5% and a WACC of 9.5% suggests a fair value of $69.73. The company has been firing on all cylinders yet competition remains fierce and a significant amount of the firm's sales are tied to a small number of customers, including the likes of O'Reilly, Advance Auto Parts, and other auto retailers. The strength of these retailers should be watched closely for clues as to Dorman’s vitality yet with the average age of active light duty vehicles on the road increasing, Dorman should be able to continue expanding market share while rewarding shareholders over the long term.

Disclosure: Logos LP is long DORM.

Munro Muffler: Continued Growth in Auto Retailing

Monro Muffler Brake Inc. is a quality company trading below intrinsic value. The company is a leading provider of automotive repair and tires services that has been growing steadily during these turbulent times. Sales have been growing by low single digits and they are opening new stores to meet growing automotive service demand. The company saw non-tire categories grow in the mid single digits with total gross margin increasing to over 39% in its latest quarter. Last quarter was particularly difficult for the company, as warmer than expected weather resulted in lower tire sales than the same time last year. For the first nine months, net income grew by high single digits while sales grew by over 5%.

What is the story on Monro?

The key for the company will be continued consolidation in this space given the significant amount of segregation by independent dealers, which is a large reason for the company increasing liquidity via its new $600 million credit line. Fiscal 2016 acquisitions completed year-to-date represent a total of over $30 million of annualized sales and include Car-X which is a franchise of locations in ten different states. The company is also driving positive momentum technically to support its fundamentals: the company is 1.51% above its 20 day SMA, 5.48% above its 50 SMA and 4.05% above its 200 SMA. Further, the organization does a good job of creating value with its +32% Return on Capital and has increased retained earnings by $50 million over the past 5 quarters. Only time will tell whether the growth will continue, and investors need to watch out for Munro taking on too much debt, but these positive catalysts during uncertain macroeconomic times make Munro Muffler an attractive opportunity.

Credicorp: An Emerging Market Opportunity?

Credicorp (NYSE: BAP) is a unique undervalued financial services name operating in Peru trading at a forward earnings multiple below 11. The company provides services and products in banking, insurance, pension funds and investment banking under five operating subsidiaries. On multiple metrics, it looks like Credicorp is cheap with its current market price trading well below its DCF earnings base multiple, median P/S value and Graham value. Unsurprisingly, the company has an astounding 192% ROIC with ROE over 20%. Revenue growth over the last three years has grown at a CAGR of over 26% with EBITDA growth exceeding 11% over the same timeframe. Book value has grown by nearly 60% while retained earnings have grown by over 40%.

Year-to-date the company is up over 23% and is above both 50 and 200 day moving-averages implying positive movement despite being down 17% over the past year. The company has a great dividend yield of 1.82% with a 5-year growth rate of over 6%. Further, this is not a cheap “cigar-butt” like stock despite trading below many fair value multiples. Over the last 3 months, net interest margins increased by over 4% to over 56% with yearly earnings increasing by over 235%. Despite this positive margin expansion, loan loss provisions have declined which have no doubt improved FCF. With emerging markets in turmoil over the last few months due to uncertainty, Credicorp could provide patient global investors with above average long-term returns.