Analysis of TESSCO Technologies Inc.
Haven't done one of
these analysis posts in some time so I am a bit rusty. Not having any capital to deploy I still
screen and look at the top ten to see if any are worth watching and that is
about it. Taking a deeper dive into one
of those companies takes a little bit more time but I have some time now so why
not.
According to their
site they are the one stop shop for setting up or fixing wireless technologies
for carriers or companies. They not only
want to design cell phone towers but also act as the supply chain for any and
all parts needed to construct that tower and get it functional. Wireless is big business but is also capital
intensive. So TESS aims to capture most
of that capital by providing the most efficient and high quality service to the
carriers.
Value
When I performed the
screen the P/E was high at 18.05.
Looking on Morningstar the forward P/E is looking more favorable at
9.2. As with most dividend investors to
get the most bang (yield) for your buck you want to buy stock when value
presents itself (< 20 P/E). This
stock is looking more favorable in the near future but the drop needs further
looking at. Earnings for the year and
the big miss in the beginning of May are most likely the cause of the
drop. However future earnings growth YOY
for next year are back in the positive range around 12%.
The
other ratio I like to look at when determining value is the price-to-sales,
P/S, ratio. Are you getting the value
for each share you purchase compared to how much revenue they are generating
from sales? When this dips below 1 this
is a good sign and presents an opportunity to get in (if future sales continue
to grow). TESS is sitting at a nice
ratio of 0.3 when the screen was done.
They just wrapped up FY2015 and are forecasting a slightly better
earnings for 2016.
Growth
After the 4th quarter
earnings of $0.01 per share it is no wonder the price has gone down. What does long term growth look like? I like to look at the past to help in
predicting the future and this year I switched over to looking at the Forward
PEG. It is important to make sure the
earnings are in line with the price you're paying.
Over the past five
years the average growth is 18.8% Double
digit growth rates are always good but this year was a big slow down. YOY EPS for the past twelve months has gone
in the negatives with a -62.26%. Looking
over the past 5 years it has been swinging around. At least when you look at the earnings per
share it seems a bit more stable and was growing nicely until 2014.
1.20 was the PEG at
the beginning of the month before the price dropped after the earnings
miss. The forward PEG will most likely
be more attractive if the stock price remains low and earnings grow for the
rest of the year. 1.20 is not bad but we
want to make sure earnings are going the right direction before pulling the
trigger.
Quality
Quality factors like
how is the company managing debt and how it is spending its money are signs of
how management is running the business.
Again we like to see low numbers on this part of the screen. Under one is best for Price-to-book ratio but
1.8 for the last quarter is not bad either.
The next quarter for TESS should look even better if the price remains
where it is at. Looking at the chart
above you can see the steady climb of the value of a share with regards to the
book value of the company.
The debt-to-equity
ratio has been so small (way under 1) since 2005 that I didn't bother adding it
to the graph this time around. The
highest was in 2005 when it was only 0.08.
This is great management of your debt if you ask me. The only downside is being a one stop shop
they tend to carry allow of inventory
and other assets. You have to
generate enough cash to keep the capital flowing to be a supply chain so the
recent down year might affect the quality
if cash runs out. With that said
do they even have enough cash to increase the dividend?
Yield
When the screen was done in the
beginning of May the yield was at a respectable 3.17. It has since climbed to around 4.43% because
of the earnings miss for their last fiscal quarter for 2015. In the 4's isn't bad if it represents an
opportunity to buy a good company during a rough patch. That entry point coupled with some kinda of
dividend growth every year is good for any portfolio.
Even the past 5 years of dividend
growth are remarkable. The screen shows
me 43.1 percent with the payout ratio all within reason. This is about where I wish I could go on about
how this is continuing and you better watch this guy closely. Unfortunately the payout ratio is sitting
around 77.7% (based on EPS of $1.03) and isn't likely to get better. To manage the debt and cash flows it looks
like the dividend has stopped growing.
With that said it will most likely fall
off of the U.S Dividend
Champions list. There was no increase in calandar year 2014
and the companies latest news for the fiscal year end just says it is
reaffiming the $0.20 dividend. I read
that as no more increases for this year and be happy were not cutting it.
News
TESS gave this highlight which
tells me they had to many eggs in one basket and are now paying for it;
"Continued our transition
and restructuring initiatives to renew growth and profitability and reduce
concentration on any one key customer or market"
Conclusion
Everything looked
good until we got to the yield
section. At this point it is looking too
risky to initiate a position in this stock if you’re a dividend growth
investor. That plus it's short history
of paying a dividend should be a warning sign.
Even though it came up as number one in my screen for May I will not be
watching TESSCO unless they start raising the dividend again.
Your thoughts?
Thank you for reading,
The Dividend Family
Guy
Full Disclosure: I do not own TESS
Well, I was getting all excited at first as I though you made me discover a new stock to closely watch... but you're right. The last part makes it less attractive. Hope for them the restructuring plays a positive role.
ReplyDeleteCheers,
Mike
Yeah I was bummed to. Thanks for stopping by.
DeleteDFG
Hi DFG,
ReplyDeleteTESS is too small for me to really be interested in them as their market cap is 'only' $150M or so.
I think an "earnings miss" can be a good opportunity at times as it's really just indicating the analysts expectations which are frequently wrong - 50% of analysts are below average by definition! :)
But on a free cash flow basis, they seem to be generating a fair amount of cash against fairly low operating expenses - $17M income, $4M capital expenses leaving $13M to cover their $7M dividend payments. They spent a lot of cash on stock repurchases as well as the dividend.
I'd tend to agree with you that it's not looking good for a sustainable dividend increase. I'd rather get a 4% yield from a company like VZ, T or CVX.
Nice analysis though, thank you!
Best wishes,
-DL
Agreed bigger is better.
ReplyDelete