Streetwise
Lauren Rudd
Sunday, November 15,
2009
Profitable Companies Are Always A Bargain
As Waldo Proffitt, the former editor of the Herald-Tribune,
adroitly pointed out recently, the Great Recession was an inevitable result of
banks and other financial institutions irrationally gambling away billions of
dollars. They did so by buying, selling and insuring high risk financial
instruments, many of which were worth considerably less than the inflated values
being attached to them.
Enabling the ensuing carnage was the permissiveness of
allowing the systematic dismantling by Congress of the restraints enacted years
prior to prevent the reoccurrence of the abuse on Wall Street that led to the
Great Depression.
In viewing the damage brought upon so many by so few, is it
not reasonable to expect Congress to act rationally and with due haste to repair
the damage? Unfortunately, such thinking is naïve and in error.
Instead of buckling down and trying to get the economy back
on track with the necessary safeguards reinstated, Congress acts in a manner
that is a cross between the foolish high jinks of intoxicated college students
at a fraternity party and the irascible feud between the Hatfields and McCoys.
Meanwhile, the poster child of excess, Goldman Sachs, has
taken a more religious stance. Lloyd Blankfein, the CEO of Goldman Sachs says
his firm is doing "God's work." This is a bit audacious coming from a company
that is planning to give many of its employees what amounts to multi-million
dollar pay packages a year after aiding the collapse of the credit markets and
then being forced to go hat in hand to the public trough. And there is the small
matter of the billions of dollars Goldman made Uncle Sam pony up as a result of
the contractual agreements Goldman had with AIG that the government felt forced
to guarantee.
So how does all this affect you the individual investor?
Could it be that now is the time to hunker down and place any funds you may been
able to recoup in the recent Wall Street rally safely under a mattress or in a
government insured Certificate of Deposit with a yield of less than the level of
inflation?
Absolutely not and the reason is simple; a solid profitable
company whose shares are under priced is always a bargain. A good example is
Cubic Corporation (CUB). The company engages the development and manufacture of
defense electronics and transportation fare collection systems.
For its fiscal third fiscal quarter ended June 30, Cubic
reported sales of $248.2 million, as compared to $232.9 million a year ago. Net
income increased 76 percent to 56 cents per share, as compared to 32 cents per
share a year ago. Operating income for the third quarter was $21.6 million and
cash flow from operations was $49.5 million. The company once again improved its
strong liquidity position during the third quarter, ending the period with
$227.6 million in cash.
The company’s backlog on June 30 was $2.116 billion. That
compares favorably with the $1.772 billion in backlog on September 30, 2008, the
close of its 2008 fiscal year. Furthermore, the acquisition of a transportation
systems service operation last July will increase the fourth quarter backlog at
the transportation systems division by more than $100 million.
Using a discounted earnings model to analyze the company
produces an intrinsic value for Cubic of $62 per share, while the more
conservative free cash flow to the firm model suggests an intrinsic value of $45
per share. My earnings estimate for the 2008 fiscal year ended Sept. 30, 2008
was $1.35 per share. The company earned $1.38 per share.
My estimate for 2009 was $1.80 per share. I am raising that number to $2.10 with
a $2.35 estimate for 2010. My 12-month target price on the shares a year ago was
$24, against a price back then of $20.54. The shares recently closed at $34.81,
resulting in a capital gain of 41 percent. My current 12-month target is $40 per
share, indicating a potential gain of 15 percent, plus the current dividend
yield of 0.50 percent.
