Recently Profiled Companies Show Healthy Growth – CPKF, AMNF

Chesapeake Financial Shares – CPKF

Since I wrote about the company at the beginning of October, Chesapeake has been busy. The company announced third quarter earnings of $0.75 per diluted share, 36% higher than the third quarter of 2011. The merchant card services division was a standout, increasing revenues by 32% over Q3 2011. The company also announced a 9% dividend increase to 12 cents per quarter. Trailing twelve months earnings now stand at $2.41 per share and book value per share is $18.44.

Chesapeake has just released plans to make a tender offer for up to $1.5 million of its shares at $18.50. If fully subscribed, the tender offer will reduce shares outstanding by 2.5% and increase trailing earnings per share by 6 cents to $2.47.

Chesapeake’s shares were trading around $14.50 when I first wrote about the company. The current bid/ask midpoint is $17.625, an increase of 21.6%. Despite the run-up, Chesapeake Financial Shares still trades at a modest 7.3 times trailing earnings and 95.6% of book value with a 2.7% dividend yield.

Armanino Food of Distinction – AMNF

The day after I wrote about Armanino Foods, the company released its third quarter report. Sales grew 6% year over year and earnings per share grew 25%. Net income for the twelve trailing months stands at a record $2.72 million, or $.084 per share. The company’s share price has remained stable at around 94 cents, allowing the P/E ratio to decline to 11.2.

I continue to view each of these companies as attractively-valued, high-quality franchises with great growth potential. I hold a position in Chesapeake Financial Shares and will continue to do so until they reach fair value.


CTM Media Holdings – CTMMA/CTMMB

CTM Media Holdings is profitable and growing. The company’s valuation is modest and its dividend policy is generous. What’s more, the company is over-capitalized and carries no debt.

I must preface this analysis by acknowledging a few risk factors. CTM Media Holdings is miniscule, with a market cap of only around $16 million. CTM Media Holdings is also extremely illiquid. Shares trade only once in a blue moon, and the bid/ask spread is gigantic. Class B shares recently showed a spread of $35.05/$44 and total dollar volume in class B shares was about $35,000 over the last three months. Class A shares saw even less activity. Clearly, any investment in the company should be entered into carefully, with the realization that injudicious trading may move the market and exiting the position may be close to impossible in the short term. That said, CTM Media Holdings offers compelling value and patient investors may want to read on.

CTM Media Holdings was spun off from telecommunications provider IDT Corporation in 2009. Shareholders received class A, B and C shares in various ratios. CTM Media Holdings operates in two segments: CTM Media Group and IDW Publishing.

CTM Media Group provides brochure marketing targeted at travelers in the American Northeast and Midwest, as well as Eastern Canada, Florida and Puerto Rico. Ever walked into a highway rest stop or hotel and seen racks filled with brochures advertising local (sometimes dubious) attractions like amusement parks, historical sites, dining and shopping? That’s what CTM Media Group offers. CTM Media Group is the second largest national competitor in its line of business. The company has introduced some digital products, but the large majority of revenues are derived from traditional brochures displays. This is not a growth business, but it is profitable.

CTM Media Group’s revenues have remained essentially flat since 2010. Margins took a dive in 2011, but have since recovered slightly. Revenues and profits in the segment are sensitive to consumers’ travel habits, which are dependent in turn on factors like gasoline prices and consumer confidence. I expect future results to come under pressure as consumers rely more and more on smartphones for travel information and leave brochures languishing on the racks.

CTM Media Holdings’ growth engine is its other operating segment, IDW Publishing. CTM Media Holdings owns 76.7% of IDW. IDW publishes books, comic books and graphic novels. IDW’s stable of content includes the rights to several very popular series, including HBO’s True Blood®, Star Trek®, Transformers®, G. I. Joe®, Doctor Who® and many others. IDW has done well in creating products that appeal to fans, and revenues are increasing rapidly.

Revenues for the 12 trailing months are up 41.3% from 2010, resulting in a swing from losses to substantial income. IDW’s future results depend on its ability to continue creating high-quality content associated with popular media properties, but the company seems to have hit on a winning formula.

On a combined basis, CTM Media Holdings’ operating segments have seen healthy revenue and profit increases since 2010.

Revenues have increased by 14.9% since 2010, while operating income has more than tripled on the strength of IDW Publishing. In 2010, IDW Publishing contributed 38.1% of revenues and -37.7% of operating income. In the 12 trailing months, IDW Publishing contributed 46.9% of revenues and a whopping 74.5% of operating income. Results at the consolidated company will accelerate if IDW Publishing can continue its success and constitute an ever-larger portion of the company’s revenues and earnings.

CTM Media Holdings showed huge net income figures in its GAAP statements in 2011 and year-to-date, but these were distorted by write-ups in the tax value of net operating losses in the CTM Media Segment. The company determined it was more likely than not to be able to utilize these NOLs fully, resulting in the large increase in net income, assets and equity in 2011 and the quarters following.

The company’s balance sheet is highly liquid, with cash and short-term securities of nearly $20 per share and minimal liabilities outside of normal working capital. Shareholders’ equity stands at $65.61 per share.

CTM Media Holdings produces around $2.2 million in free cash flow per year, which may increase as IDW Publishing grows. The company has adopted a $1.20 per quarter dividend policy, resulting in $1.98 million in annual dividend payments. This $4.80 annual dividend rate provides a substantial yield at the company’s current share price, yet does not reduce the company’s significant excess cash balances. The possibility of special dividends and/or share repurchases remains.

Because of the wide gulf in the bid/ask prices for the company’s shares, I will present valuation data for each end of the spread, as well as the mid-point. These prices are those of the slightly more liquid class B shares, of which there are 303,112 outstanding. Operating income is adjusted for minority interest in IDW Publishing. Operating income should approximate net income to shareholders for the foreseeable future, until the company works through its NOLs.

At the low end, the company trades at 6.55 times operating income and 53% of book value, with a completely sustainable dividend yield of 13.69%. At the high end, the company trades at 8.22 times operating earnings, 67% of book value and a dividend yield of 10.91%.

What’s more, the company holds at least $5 million in excess cash, over $12 per share.

A price anywhere in the current bid/ask range represents an exceptional value for a growing company with an rock solid balance sheet. For investors with the patience to undergo the difficult task of acquiring shares, CTM Media Holdings may represent an excellent investment with potential for both capital appreciation and current yield.

Disclosure: No position.




Armanino Foods of Distinction – AMNF

Ever have a stock that “got away?” You did the research and liked what you saw. Modest valuation, positive business trends, high returns on capital and even a dividend, but for some reason you never pulled the trigger and eventually forgot about it? That’s my story with Armanino Foods of Distinction.

Armanino, headquartered in Hayward, California, manufactures and markets frozen Italian specialty foods. Its chief product is a basil pesto, but it also creates other flavors of pesto as well as sauces, pastas and meatballs. Armanino’s products are completely natural and do not contain preservatives. The company’s products are marketed to grocers in the Western United States.

I first looked at Armanino back in 2010, when shares were changing hands for around 50 cents. I was impressed with the company’s consistent sales growth and commitment to returning capital to shareholders. Not as impressed as I should have been, however, because I never got around to purchasing any shares. Undoubtedly, I purchased some marginal, forgettable company instead and paid the price in missed returns.

If any pink sheets company can be considered a “blue chip,” Armanino is one. The company has paid regular dividends for 49 consecutive quarters, plus 10 special dividends along the way. Annual revenues have increased every year since 2004. The company has virtually no debt. Here’s a look at the company’s 5 year results.

Since 2007, the company’s revenues have grown at 7.6% annually. With size has come efficiency. Armanino’s operating margins more than doubled over the time period. The company has also succeeded in holding down manufacturing costs and introducing higher margin products, resulting in improved gross margins. The result has been annual earnings growth of 26.2% since 2007.

Armanino’s track record of growth and profitability is impressive, but even more impressive is the company’s record of returning capital to shareholders. From the end of 2007 to the end of 2011, the company produced  $6.96 million in profits, but returned $7.23 million to shareholders through dividends and net share repurchases. During this period, revenues rose 30.3% and earnings rose 162.6%.

The significance of these figures should not be underestimated. Nearly all companies require reinvestment in order to grow and create higher profits in the future. Companies retain a portion of earnings in order to invest in marketing, research and development, plant & equipment and other productive assets, all with the goal of increasing future profits. Armanino retained absolutely none of its earnings from 2007 through 2011, yet increased earnings significantly. A company that can grow with no additional shareholder investment is a rare find.

To illustrate this advantage more simply, imagine an investor who buys a laundromat in a busy neighborhood for $250,000 in cash. After running the laundromat for a year, the happy owner has made a profit of $50,000 after all costs, including depreciation and taxes. Return on equity is 20%. At this point, the owner has a choice. He can pay himself a $50,000 dividend and go on running the laundromat as is, expecting to make another $50,000 (give or take) next year. Or, the owner can reinvest profits to create growth. Maybe the owner pays himself a dividend of $25,000 and uses the remaining $25,000 to upgrade the laundromat’s lighting, install a few shiny new high efficiency washers and buy ads on a billboard along a crowded local highway. If these new investments return 20% after taxes, the owner will make $55,000 next year, an improvement of 10%. Return on equity remains at 20%.

But what if the owner pays himself the entire $50,000 year one earnings as a dividend and the laundromat’s profits still increase to $55,000 next year? And year after year the owner pays himself a dividend of 100% of earnings, only to see earnings increase again the next year? It might be due to pleased customers advising their friends to become patrons, or perhaps the neighborhood’s population is growing. Regardless of the cause, the business is accruing intangible assets (call it goodwill or an economic moat or whatever you please) and the business’s return on equity and market value are growing without any additional investment by the owner.

This is the ideal scenario for an investor, and it is what has happened to Armanino Foods of Distinction. In 2007, the company produced a return on equity of 16.4%. In 2011, return on equity was 39.3%, all with net negative additional shareholder investment in the interim.

Armanino’s valuation is reasonable for a company with such an attractive growth trajectory and minimal reinvestment need.

At 11.6 times trailing earnings, Armanino has an earnings yield of 8.6%. The dividend yield is 6.4%, including the recent special dividend.

Risks to Armanino’s future profits include its highly concentrated customer base and its reliance on the domestic economy. In each of the past three years, about 50% of the company’s sales were to a single, unidentified distributor. 77% of accounts receivable at the close of 2011 were owed by just two customers. In 2011, only 10% of the company’s sales were to international customers. The company’s fortunes also depend on the continued popularity of basil and pesto, but I am not too concerned about that.

I regret not buying shares in Armanino at 50 cents, but I still view the company as attractively valued at 94 cents. If the company can continue to execute like it has in recent history, investors should expect higher profits and a healthy dividend each quarter.

Disclosure: No position.


AutoInfo – AUTO

AutoInfo is a transportation and logistics broker. The company operates primarily through its subsidiary, Sunteck Transport Group. Though AutoInfo plays the role of middleman, its services improve efficiency and reduce costs for both providers and purchasers. Smaller businesses often have irregular and sporadic shipping needs, so contacting Sunteck when the need arises may be cheaper than keeping a shipping manager on staff. Truckers, especially owner-operators, may not have the time to seek out clients and are always looking to reduce zero-revenue miles between loading points, so having Sunteck serve as dispatcher benefits them as well.

AutoInfo is non-asset-based, meaning it does not own trucks or other transport equipment. Instead, it employs a network of sales agents who contract with businesses and transportation providers in return for commissions. The model is extremely asset-light and requires little capital expenditure.

The model is also successful. From 2002 to 2012, the company grew revenues from $18.86 million to nearly $300 million, profiting in every year. Even after this tremendous growth, the company remains a tiny player in the highly fragmented $200+ billion freight industry. The company creates growth by hiring additional sales agents in new markets and incentivizing its existing agents to increase revenues. Since sales agents are compensated entirely by commission, adding additional agents creates nearly no additional overhead expenses.

A look at the company’s recent results follows. (2011 and twelve trailing months figures are adjusted for the acquisition and subsequent disposal of a contract with a significant sales agent in 2011. The company was able to unwind the contract without any material loss and provided pro forma financial data in the most recent quarterly report.)

Twelve trailing months revenues, operating income and net income are the highest in the company’s history. Earnings per share grew 22.8% annually since 2007.

The company has managed its balance sheet well. Since peaking in 2010, total indebtedness has been reduced to the lowest level since 2007. Book value has growth at a healthy rate from $0.39 per share in 2007 to $0.75 per share at present, or 15.75% annualized. Diluted shares outstanding have seen only a modest increase over the time period.

Despite a strong history of revenue and earnings growth and a healthy balance sheet, AutoInfo’s valuation is modest.

A trailing P/E of 7.40 is appropriate for a slow-growing, highly indebted or deeply cyclical company, not AutoInfo. What’s more, the company trades at just 1.10 times book value despite consistently increasing book value per share at a mid-teens rate.

AutoInfo’s officers and directors own 26.9% of shares outstanding, giving them plenty of motivation to grow the firm’s market value. Investors James T. Martin and Kinderhook Partners, LP own another 34.9%. Activist investors Baker Street Capital and Khrom Capital Management own 13.4% of shares outstanding and have filed a 13D. In the 13D filing, these activist investors urge management to consider a sale, noting positive acquisition trends in the freight broking industry.

AutoInfo is not without a few drawbacks. Management’s compensation is high and the low float limits liquidity. The company competes with many much larger and better-known firms, though so far is has fared well. A national recession or sharp increase in fuel prices would reduce its demand for services as well as its available suppliers.

On the whole, AutoInfo presents an opportunity to buy a growth company at a value multiple. If the company is successful in executing its plans for growth, investors may be rewarded when the market eventually appreciates AutoInfo’s results, or when the company is sold to a larger competitor.

Disclosure: No position.


A Quick Note on Computer Services, Inc. – CSVI

Computer Services, Inc. is an example of a hugely successful public company that is not listed on a major exchange. The company has an impressive long-term track record that exceeds nearly all its exchange-traded peers, yet remains relatively unknown. The company has 10 year revenues and earnings growth rates of 8.8% and 13.4%, respectively. Dividends have grown 16.7% annually over the same period. Shares outstanding have declined by 11.9% since 2002.

I first profiled the company back in May, but passed on investing. Even with the company’s stellar track record of growth, I couldn’t justify paying 19.2 times earnings. Since then, shares are down 13.9% even as the S&P 500 index returned 7%. Through the first two quarters of 2012, the company’s revenues have increased by 7.1% on an annualized basis. The company also raised its dividend by 12%. The result is a much cheaper company.

Though revenues are up, net income was nearly flat for the first half of the year. The company explains in its quarterly report released October 8, saying,

“Our first half operating expenses increased at a faster rate than our revenue growth due to higher costs associated with our Strategic Growth Initiative (SGI) and the incurrence of conversion costs to bring on major new processing customers. We expect additional revenue from new accounts to more than offset higher expense levels in the second half of the fiscal year.”

The company continues to win new customers and make strategic acquisitions. I am generally skeptical of companies that grow by acquisition, but Computer Services has proven to be superb at identifying, purchasing and integrating smaller companies. As integration costs recede, the company’s net income should rise.

While not “cheap” by traditional value investing metrics, Computer Services should command a premium as a superior operator in an industry with high switching costs. Since 2002, the company’s average return on equity has been 24.8%. Clearly, the company is able to reinvest retained earnings at attractive rates and has avoided “growth for the sake of growth” transactions.

Since 2002, Computer Services has traded at an average trailing P/E ratio of 17.1 (calculated using June 1 closing prices and trailing earnings data from annual reports released each May). The company is as strongly financed as ever, carrying no debt. What’s more, Computer Services operates much more efficiently than in 2002, recording a 22.66% operating margin in 2012 compared to 16.28% in 2002. When the market offers investors opportunities to buy high-quality companies at discounts to their long-term historical valuations, investors should take notice.


Disclosure: No position.



ACME Communications: A Special Dividend Story – ACME

ACME Communications is in slow motion liquidation. In 2002, ACME owned 11 TV stations. Since, the company has been gradually selling off its stations and paying special dividends with the proceeds. On September 10, the company announced the sale of its final three station broadcast licenses and associated station assets for $17.3 million.

License transfers for the three stations requires FCC approval. The company expects to receive the go-ahead  for the license transfer in late 2012 or early 2013. (I view the risk of any delay as extremely low, given the small size of the buying and selling parties. There is no market concentration or monopoly issue at hand.) After the transaction is completed, ACME “plan[s] to distribute virtually all of our cash to our shareholders,” said CEO Doug Gealy.

ACME Communications has 16.047 million shares outstanding with a current price mid-point of $0.86. Assuming the company dividends the entire $17.3 million to shareholders, the dividend will be $1.078 per share, or 24.5% higher than the current market price. (While the tax status of this dividend can’t be fully determined in advance, previous special dividends from station sales have been treated entirely or almost entirely as returns of capital due to the company’s accumulated losses and minimal current profitability.)

This dividend calculation ignores possible frictional transaction expenses like legal fees, but also ignores the $528,000 in cash on hand the company reported in its June 30, 2012 quarterly report. Taxation will not be an issue for the company as it had over $33 million in net operating loss carryforwards as of December 31, 2011.

A buyer of shares at the current price stands to realize a handsome rate of return when the special dividend is received, both in absolute and annualized terms. But the story isn’t over. ACME Communications has one remaining asset, its live morning news show The Daily Buzz which it produces and distributes to 200 TV stations nationwide. The company is presently seeking to sell this asset and finish the long liquidation process. Fisher Communications owns an option to acquire The Daily Buzz which was set to expire on September 30, 2012. The company has not yet disclosed whether or not Fisher exercised its option. Whether Fisher Communications or another company acquires The Daily Buzz, any amount received will represent value for shareholders above the already substantial dividend expected from the stations sales.

Risks to the scenario include the possibility that the FCC will delay or block license transfers or that the buyers will renege on the agreements made. I view these risks as minimal, due largely to the company’s historical success in selling its assets smoothly and without issue. The current market discount to a the conservatively estimated size of the upcoming special dividend can likely be explained by the company’s tiny market cap ($13.8 million) and limited liquidity. What’s more, this opportunity is too small to be exploited by arbitrageurs in the hedge fund community, leaving a nice opportunity for individual investors or smaller funds.


Disclosure: No position, may initiate soon.



Chesapeake Financial Shares, Inc. – CPKF

The more I time I spend investigating the banks and thrifts that trade OTC, the more opportunities I find. There are many highly profitable, conservatively financed and growing banks and thrifts that trade at a single digit P/E and a fraction of book value.

One of these is Chesapeake Financial Shares, Inc. which operates Chesapeake Bank in coastal Eastern Virginia. Chesapeake also operates a wealth manage practice, a receivables factoring business and a merchant services business that processes card transactions. Chesapeake has been in operation for 112 years.

Loan Quality – Chesapeake’s loan book is solid. At year-end 2011, non-performing assets made up 2.67% of total assets, 43.3% lower than the national bank average of 4.71% calculated by the St. Louis Fed. The bank’s Texas ratio is very low at 10.9%. Chesapeake is mainly a small business lender, which tends to be riskier than traditional prime mortgage lending. However, Chesapeake’s loan book held up very well during the financial crisis, during which the bank remained consistently profitable.

Capital Ratios – Chesapeake has a 9.04% tangible common equity to assets ratio. The company’s risk-based capital ratio is 14.63%, well above the 10% the FDIC considers “well-capitalized.” High capitalization levels are not fool-proof; loan losses from bad underwriting will eventually eliminate the most well-capitalized bank’s reserves. However, high capital ratios provide a buffer from the normal economic cycle for banks with good loan books. On the other hand, high capital ratios limit profitability as well.

Profitability – Although Chesapeake is conservatively-capitalized, the is still highly profitable due to a large net interest margin and its other business activities. In 2011, the bank produced a return of average assets of 1.13% and a return on average equity of 15.31%. The company’s three year mean return on average equity is 14.00%, good enough for 16th in the nation among community banks and thrifts as reported by American Bank Magazine.

Consistency and Growth – Chesapeake’s public financial statements for years 1995 to Q2 2012 are available on the company’s website or from EDGAR. Chesapeake reported positive net income in every year during the period. From 1995 to the end of 2011, Chesapeake grew deposits at 9.98% per year. Earnings per share grew 9.44% annually and dividends per share grew at a 9.00% rate. Book value per share grew 8.40% annually even as the bank paid out 20% or so of earnings as dividends each year. The company’s recent growth rates have slowed, but that is to expected as the bank weathered one of the worst recessions in US history. For the twelve trailing months, Chesapeake produced record earnings of $2.24 per share and hiked its dividend to $0.44 annually. Book value per share now stands at $17.45.

Valuation – Despite its strong loan book, record earnings and continued growth, Chesapeake’s valuation is nothing short of depressed. At a mid-point of $14.30, Chesapeake has a trailing P/E ratio of 6.4 and a dividend yield of 3.1%. Price to book ratio is 0.82. Low price to book ratios are entirely justified for companies that do not earn their cost of equity, but Chesapeake certainly has it covered at a 15.31% return on equity.

I own shares in Chesapeake. With a 15.7% earnings yield, a discount to tangible book value and a history of growth and dividend increases, I don’t mind waiting around for the market to recognize the value of Chesapeake’s franchise.