Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future.

Marine Products (MPX) - 07 Jun 2016 23:17

Tags: mpx stock_review_2016

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Back in my younger days, every free chance we got we would travel to Maine to enjoy some vacation time on Big Sebago Lake. Back then we cruised the lake on a 19 foot Chaparral Bow Rider filling up our time with water-skiing, tubing, or just relaxing on the boat and taking a slow cruise. There were quite a few boats on the lake back then but Chaparral was the outright favorite for boaters.

That was 20+ years ago and I no longer have a boat nor do I travel enough to the lake I enjoyed for oh so many summers. But to my surprise I have discovered that Chaparral boats are still being manufactured today and remain the top seller. Even more surprising I discovered the manufacturer of Chaparral is a publicly traded company under the name Marine Products Corporation (MPX) and (this is the best part) on its way to becoming a dividend growth company.

MPX manufactures fiberglass boats under the product names of Chaparral and Robalo with a total of 50 different products. While Chaparral has long been known for power boats, the Robalo brand was acquired shortly after the company was spun-off in 2001 and provided instant access to the recreational salt water fishing market.

In regards to competition, MPX’s largest competitors are Bayliner, Cobalt, Regal and Sea Ray but the powerboat market is extremely crowded with many other smaller companies with traditional names like Chris-Craft, Four Winns, and Starcraft. Competition is not any lighter in the fishing boat market and MPX needs a consistent new product roll-out in both markets to remain current and competitive.

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As a dividend grower MPX has been paying a dividend since 2001 but drastically cut it in 2009 and suspended dividends in 2010 and 2011. Since 2009 the dividend has grown from $0.01/share to $0.24/share with a recent 50% increase. In addition to the generous dividend growth, MPX has issued a special dividend every year since 2012. If you had the courage to endure the 2009-2011 dividend cut, you would have been well compensated for lost dividends via the special dividends.

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Like any investment we shall perform the due diligence of analyzing MPXs annual financial statements to understand if the dividend is on solid ground and opportunities for dividend growth.

Note: The following financial analysis is based on MPX’s 2015 annual report.

Liquidity

2015 2014 2013
Current Ratio 3.79 3.31 3
Quick Ratio 1.21 .77 .87
Days to Collect Receivables 2.12 4.99 4.35
Days to Sell Inventory 73.9 76.7 76.7
Liquid Current Assets $17M $10M $13M
Long Term Debt $0 $0 $0

The current and quick ratios indicate a strong level of liquidity and when you combine it with no long term debt this company is well positioned to access cash for emergencies or to capitalize on opportunities.

The days to sell inventory seems high but considering they operate in a seasonal consumer discretionary market it is not out of line.

Profitability

2015 2014 2013
Revenue Growth Rate 55.55% 12.5% 14.2%
Operating Expense Ratio 11% 12% 12%
Net Income as a % of Sales 7% 5% 5%
Return on Assets 13% 9% 8%
Cash Used for Investing $3M $4M 1M
Free Cash Flow $6M $1M $4
Dividend $8M $6M $6M

MPX has been improving in many areas year over year. Operating expenses are decreasing, revenue is growing and they are getting better returns out of their investment into capital expenditures as shown by the growing Return on Assets.

Credit Risk

2015 2014 2013
Debt Ratio 0.18 0.19 .20
Interest Rate Coverage Ratio - - -

MPX has no long term debt so there is no interest rate coverage ratio. The debt ratio which is amazingly low gets better year over year, another indicator expenses are shrinking and margins are growing.

Future Growth

2015 2014 2013
Capex to Depreciation Ratio 4 .57 .71
R&D Investment $663K $743K $1.1M
Acquisitions $0 $0 $0
Share Buyback $16M $22M $15M

As stated earlier, MPX operates in a pretty crowded market so they need a continuous year after year launch of new or upgraded products. MPX is not making extreme investments, management knows their business and markets extremely well and strategically invest the right amount of money into capital equipment and R&D. For example, last year MPX rolled out the all new Robalo 160. The Robalo 160 a smaller boat that is reaching a new market thanks to its low cost for boating beginners.

In regards to acquisitions I am not surprised that no money has been has been spent. The boating market is fairly crowded and acquiring another boating product would cannibalize existing sales. While management continually states they are open to acquisitions, I believe that sentiment is limited to acquiring new manufacturing or material technologies to improve existing product lines.

Shareholder Value

2015 2014 2013
P/E Ratio 16 36 48
Book Value per Share $2.39 $2.2 $2.15
Dividend Yield 3.3% 1.9% 1.49%

MPX’s share price has not grown with its revenue growth, improving book value, or reduced operating expenses. I understand share prices were overinflated during 2013 & 2014 based on the high PE but when it dropped to a PE of 16 in 2015 you have to wonder if the market is late to catch up.

Conclusion

MPX has conservative financials and is very liquid but its future is extremely dependent on how strong the economy is. The existing dividend is well covered and still has room to grow with a low dividend payout ratio of 54%.

Investing in MPX is not for those with a weak stomach. You have to be prepared for significant price volatility based on:

  1. When the economy tanks so does MPX revenue.
  2. MPX is a small cap stock with a market cap of just $315M
  3. MPX is thinly traded, average daily volume currently sits at 11,644

Because there will be significant price volatility I would initiate a small position at $8/share or lower. - Comments: 0

Polaris Industries (PII) - 31 May 2016 21:45

Tags: pii polaris_industries stock_review_2016

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Polaris Industries (PII), the maker of Indian Motorcycles, has been on my radar screen the last 6 months and my recent experience of seeing (and riding) an Indian Scout motorcycle has motivated me to perform a more detailed analysis as a dividend growth company and it also became a worthy addition to my watch list.

PII is best known for producing off-road vehicles and snow-mobiles and as such remains it bread and butter for revenue and earnings.

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Over the last six years PII has also moved into the motorcycle market with its Victory, three wheeler Slingshot and the more recent Indian Motorcycles which it acquired the rights to in 2011 and introduced their first models in late 2013.

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PII’s latest market venture is into a sector they refer to as Global Adjacent Markets. This new venture focuses on vehicle to be sold globally that specialize in moving people and supplies. This is a new strategy for PII as their other markets are dependent on consumer discretionary spending but the global adjacent market is dependent on commercial and industrial spending which is a slower growth but more stable market. While some may disagree with their latest investments I believe it to be prudent to help even out earnings during the peaks and valleys of consumer discretionary spending.

In regards to competition, PII’s chief competitor is CAN-AM and to a lesser degree Artic Cat (ACAT) and Harley Davidson (HOG). There are smaller competitors but when it comes to off-road vehicles the three top names in the business are Polaris, CAN-AM and Arctic Cat. Some would argue that Harley Davidson should be on this list due to PIIs entry into the motorcycle market but PII’s $0.7B annual revenue is nowhere close to HOG’s annual revenue of $6B. Possibly one day in the future they may be head to head competitors but for now PII has a long way to go.

As a dividend grower PII has been paying and growing their dividend for 21 consecutive years with a 10 year CAGR of 14.56%. As impressive as their historical growth has been their most recent increase was only 3.77% which may or may not indicate future problems.

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Like any investment we shall perform the due diligence of analyzing PIIs annual financial statements to understand if the dividend is on solid ground and opportunities for dividend growth.

Note: The following financial analysis is based on PII’s 2015 annual report.

Liquidity

2015 2014 2013
Current Ratio 1.4 1.29 1.02
Quick Ratio .37 .4 .33
Days to Collect Receivables 11.68 16.7 17.97
Days to Sell Inventory 76.67 65.38 57.44
Liquid Current Assets $306M $342M $278M
Long Term Debt $439M $200M $281M

The quick ratio is of mild concern as it is dependent on liquid assets (cash, cash equivalents, and accounts receivable). If the company experiences a significant downtrend greater than six months this could cause an issue. But their ability to improve how many days it takes to collect receivables has improved dramatically over the last three years and this does offset some concerns.

The Days to Sell Inventory measure is also one of concern as that number has consistently trended upward. Digging into the annual report, the issue with inventory lies with their production facility in Spirit Lake Iowa which cannot meet demand. PII has recently opened a new facility in Huntsville Alabama which should reduce some of the demand at the Spirit Lake facility in the second half of 2016. If inventory numbers do not improve then it may signal more hidden problems in their manufacturing and assembly operations.

Profitability

2015 2014 2013
Revenue Growth Rate 5.33% 18.61% 17.66%
Operating Expense Ratio 15% 15% 16%
Net Income as a % of Sales 10% 10% 10%
Return on Assets 19% 22% 23%
Cash Used for Investing $289M $247M 407M
Free Cash Flow $151M $282M $85
Dividend $139M $127M $114M
PII has solid profitability measures all around but if we had to pick on one it would be growing the revenue by only 5.33% in 2015. PIIs revenue stream was impacted by two factors. The first is a slowdown in sales of Off Road Vehicles (ORV). As shown in the chart below, the ORV segment has slowed down and even retreated a bit in 2015. This slowdown did not just impact PII but the industry as a whole with competitor ORVs experiencing the same downturn. PII has recently issued their 2016 first quarter earnings and ORVs sales were down from last year and may be a forbearer to overall lower 2016 revenue for the segment.
Segment Revenue
2015 2014 2013
ORV $3.71B $3.74B $3.26B
Motorcycles $0.7B $0.42B $0.26B
Global Adjacent $0.31B $0.32B $0.26B

The second factor of small revenue growth is again the issues of production capability at the Spirit Lake facility. Indian Motorcycles and the Slingshot three wheeler demand was stronger than expected and the facility could not meet demand. With the Slingshot model being moved to the Huntsville facility during the second half of 2016 it should open up space to produce more Indian Motorcycles.

Credit Risk

2015 2014 2013
Debt Ratio 0.58 0.58 .68
Interest Rate Coverage Ratio 63.36 64.55 96.83

While PII may not have the greatest cash position on its balance sheet it does have relatively low debt which in turn provides fantastic numbers for their interest rate coverage ratio.

Future Growth

2015 2014 2013
Capex to Depreciation Ratio 1.64 1.6 2.73
R&D Investment $166M $148M $139M
Acquisitions $41M $28M $137M
Share Buyback $294M $82M $530M

An area you cannot fault PII is that they are always putting money to work through Capital Expenditures, R&D, or Acquisitions. Though the last 3 years of acquisitions have been primarily in the Global Adjacent Markets which as stated earlier is not a growth industry but one that will hopefully provide steady earnings to offset peaks and valleys of the consumer product sales.

An area of growth concern that cannot be seen in PIIs financials lies within their motorcycle segment and more specifically Indian Motorcycles. Indian products have seen phenomenal growth in the short time they have entered the market but their largest hindrance to growth outside of manufacturing is the network of dealers. PII has approximately 200 authorized dealers while in contrast Harley Davidson has approximately 1500 dealers. Furthermore, Indian dealers are not even located in all of the lower 48 states and many consumers have had to travel across state lines just to make a purchase.

Overall I would love to see a reduction in their share buyback program and instead roll that money into a new dealer incentive plan to grow their dealer base and improve existing dealer facilities to provide a better buying experience for the consumer.

Shareholder Value

2015 2014 2013
P/E Ratio 13 23 27
Book Value per Share $14.68 $12.82 $7.71
Dividend Yield 2.40% 1.23% 1.11%

PII’s 5 year P/E average is 20.42 so its current share price is well below this with a current P/E of 13. Though I would discount the 5 year P/E average as there may have been a bad assumption that PII can continue to grow their ORV sales and investor expectations for Indian sales may have been overhyped. A more reasonable P/E range would be in a range of 12 to 16.

Conclusion

In the short term, PIIs primary catalyst for growth lies within their Motorcycle segment and ability to produce enough product to meet demand. In the long term, the Huntsville facility will eventually get to 100% capability and decent growth should return again in 2017.

Their 2015 overspending on inventory ate into profits indicating the 1 year 3.77% dividend growth rate will not be the norm once expanded production comes online. The dividend is well funded and if necessary they can dial back their investments to increase free cash flow.

Overall I rate PII a buy but based on your savings or income goals your target entry price may be different than mine. Personally I am a strong buyer if the stock price dips below $80/share and may initiate a small position if the price drops near $82/share. - Comments: 0

Domtar (UFS) Revisited - 10 Apr 2016 15:22

Tags: domtar stock_review_2016 ufs

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Domtar Corporation (UFS) designs, manufactures, markets, and distributes communications papers, specialty and packaging papers, and absorbent hygiene products in the United States, Canada, Europe, Asia, and internationally.

Last September I did a review of UFS based on their 2014 annual report and from that analysis identified areas of improvement that I would like to see. Recently UFS released their 2015 annual report and lets see how or if they improved.

Target Improvement 2015 2014
Receivables Turnover Rate 8 8.4 7.35 Pass
Return on Assets 7% 3% 7% Fail
Gross Profit Rate 30% 21% 21% Fail
Interest Rate Coverage Ratio 5 2.18 3.53 Fail

Ouch! On the surface all I see is a company maintaining existing cost structures and margins I am disappointed to not even see marginal improvements, with just this alone I would give the UFS management team a grade of C.

Digging into the annual report the only positive I could find was the growth of their personal care products which saw sales increase 24.49% over last year. While not enough to compensate for declining paper & pulp sales it is a step in the right direction from a long term perspective.

Free cash flow, after a $100M dividend payment, was $109M, Still decent enough to keep forward dividends safe and provide some room for growth.

Because of the small positives I would give management an Overall Grade of C+.

My conclusions from last September still stand and UFS management has done nothing to change my outlook.

Last September Conclusions

  • Domtar’s current dividend is safe and they have a growth path.
  • Moving more into the consumer market will require continued improvements to their financials.
  • Domtar would be a good small position to add to your portfolio. Would not initiate a major position until they have more dividend growth history and improved conservative set of financials. - Comments: 0

Linear Technologies (LLTC) - 31 Mar 2016 23:52

Tags: adi lltc stock_review_2016

At one time in our past we lived in a simple analog world and were content. Yet, over the last 25 years digital technologies have accelerated so much that the digital world is now an integral part of our daily lives and it is hard to imagine life without these new features.

As the world becomes more dependent on digital technology, the technology that converts analog to digital and back to analog will become a necessary staple in our everyday lives. These pieces of technology are far from being the hippest, coolest, or cutting edge technology but they are necessary and companies, such as Analog Devices (ADI), that have latched onto this market are becoming dividend growth cash cows in a growing market.

Another company that operates in this market is Linear Technologies (LLTC). LLTC currently trades just above $44 with a 2.85% dividend and has been a dividend grower for 23 years:

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Being in a growth market with an attractive dividend and significant historical growth may sound like a reasonable investment but deeper digging is required to determine if the dividend and growth rates are sustainable.

Note: The following financial analysis is based on LLTC’s 2015 annual report is compared & contrasted to their primary competitor Analog Devices (ADI) 2015 annual report.

Liquidity

LLTC ADI Advantage
Current Ratio 8.66 3.66 LLTC
Quick Ratio 7.55 3.14 LLTC
Days to Collect Receivables 44.29 49.62 LLTC
Days to Sell Inventory 102.32 127.87 LLTC
Liquid Current Assets $1.38B $3.49B ADI
Long Term Debt none $498M LLTC

Both LLTC and ADI have very strong balance sheets with lots of cash & short term investments on hand to easily handle liabilities and debt but overall LLTC has the advantage.

Profitability

LLTC ADI Advantage
3 yr Revenue Growth Rate 7.28% 14.33% ADI
Operating Expense Ratio 30% 42% LLTC
Net Income as a % of Sales 35% 20% LLTC
Return on Assets 28% 10% LLTC

Both LLTC and ADI are seeing significant revenue growth and manage costs to generate net income extremely well. But LLTC is slightly more efficient and has the advantage.

Credit Risk

LLTC ADI Advantage
Debt Ratio 0.16 0.26 LLTC
Interest Rate Coverage Ratio no debt 0.76 LLTC

Wow, both companies have little exposure to debt! LLTC with no long term debt tilts in their favor.

Future Growth

LLTC ADI Advantage
Capex to Depreciation Ratio 1.17 1.18 ADI
R&D Investment $267M $637M ADI

ADI has a clear advantage and explains why they have had the better growth rate in revenue. LLTC in previous years was spending much less than shown above but have recently dramatically increased spending. In the most recent quarter, LLTC announced an expansion of their Singapore facilities that will double their volume. With ever growing digital devices LLTC needs to follow ADI’s example with a consistent investment but the downside will be a drag on profitability & free cash so they need to find the right balance.

Shareholder Value

LLTC ADI Advantage
P/E Ratio 20 25 LLTC
Book Value per Share $6.44 $15.98 ADI
Dividend Yield 2.85% 2.83% ADI

LLTC’s 5 year P/E average is 20 so its current share price is in-line with historical share price. ADI’s 5 year P/E average is 21 so it is slightly overvalued to current prices but does have a more favorable book value.

Conclusion

LLTC is a solidly run company with great operating margins and no debt. Their dividend and future dividend growth are on solid ground and I’m expecting a growth rate from 7 to 8% annually going forward. A fair share price is $45 and anything below $43 would be a bargain. Their overall financials compare well to their biggest competitor and I do slightly favor LLTC due to operating margins but I would not be shy to buy ADI if the share price drops below $55 a share. - Comments: 0


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