As discussed yesterday, here are Singular Research's Top Ten “Uncovered Gems” list for 2012, spanning a diversity of industries, including Industrial, health care, technology, and energy and includes some strategic takeover candidates:
HURCO Companies (HURC)
Recent price: $22
Price target: $47.50
Analyst: Greg Garner, CFA
HURCO designs & manufactures machine tooling with Designs and manufactures machine tool products that are used to make metal products for a number of industries. The interactive computer control system automates the manufacturing process with a sophisticated controller that enables short run production very efficiently. HURCO machines are primarily used to make custom products in short production cycles.
Revenues last quarter grew 91.0% to $50.57 million, above our forecast of $46.3 million. North America revenues increased 82.0%, Asia Pacific was up 82.5%, and Europe was up 96.9%. HURC’s EURO exposure has been a positive up to last quarter. Gross margin improved to 31.3% form 17.6% in Q3:10 on higher volumes. We expect improving margins in the next year. EPS of $0.70 was well above our estimate of $0.43. Orders increased 43% with strong order growth in all geographies. The balance sheet remains healthy with $49.1 million in cash. We increase our FY: 11 EPS estimate to $1.71 from $1.44,
Ebix, Inc. (EBIX)
Recent price: $22.45
Price target: $28
Analyst: Mark Rye, CFA
EBIX is a software and e-commerce solutions provider for the insurance industry. We believe Ebix, with its software-as-a-service solutions for insurance vendors and carries, provides investors with a way to play the cloud at a more reasonable price. The company trades at 12x TTM and we think it has strong long-term growth potential. .One of the reasons why we like Ebix is because of the recent acquisition ofHealthConnect, which should be an accretive addition. HealthConnect makes sense because the company's online comparative quoting exchange complements Ebix's existing products in the Health Exchange business. It currently processes12, 000 quotes a day from over 50 carriers, including Aetna (AET) and Horizon.
The 85-percent recurring revenue with good profitability and low customer attrition rates also means this acquisition fits Ebix's criteria. On a pro-forma basis, we see Ebix consistently growing earnings by about 14 percent in 2011 and 2012. While we do think the company will continue to make a few smaller acquisitions in2012, management remains focused on growing the business organically and maintaining high margins and operating cash flow. We expect 2012 results to benefit from the expanded sales force and new integrated products the Company is now developing that will provide its customers with more straight-through-processing functionality across the four lines of insurance, Life, Annuity, P&C and Health.
OYO Geospace Corp. (OYOG)
Recent price: $74.95
Price target: $125
Analyst: Greg Garner, CFA
The Houston, TX Company supplies geophysical equipment for use in oil and gas exploration on land and undersea. It's a proven leader and its key product lines include geophones, hydrophones, string connectors and telemetry cables, specialized undersea streamer steering devices called “birds”, and borehole data acquisition systems.
Their Geospace Seismic Recorder (GSR) system is a land-based seismic system that is easily deployed, eliminates the need for cable-based connectivity among seismic units. It does not require a cable to connect to a central control facility. These features make it far easier to deploy, and lowers the cost of managing the equipment.
At current valuations of 14.6x our 2012 estimate of $5.30 a share, and with Japanese ownership filing an S-3 to sell its 20-percent stake, OYOG may present a compelling takeover candidate to larger energy players.
With that said, OYO Geospace did experience a lumpy quarter, which it is susceptible to doing from time to time. In Q4, the company's revenues declined 9.2 percent to $32.8 million, gross margin was 39 percent and operating margin was 18.5 percent. All of these came in below our forecast. In addition, earnings per share were $0.56, which missed our forecast of $0.98. The disappointing quarter was attributed to the delivery timing of several products, but the company's customer demand remains strong. As such, we reiterated a Buy rating on OYOG with a lowered price target of $125, down from $134.
Arabian American Dev. Co. (ARSD)
Recent price $8.22
Price target: $ 15
Analyst: John Curti, CFA
ARSD specializes in high purity petrochemical solvents use in the manufacture of expandable polystyrene, polyethylene and other plastics, as well an additive in gasoline, and in the production of oil and gas. The unit is beginning to enjoy increased operating leverage due to significant increases in sales volumes and selling prices in the second half of 2011, and we believe this growth will continue on into 2012. The company, through its 36.9% interest in Al Masane Al Kobra Mining Company, owns and develops mining assets for copper, zinc, gold, and silver in Najran Province of southwestern Saudi Arabia.
The company and its partners are expected to place a mine into commercial production in early 2012 and we expect ARSD will begin to see earnings and cash flow from this investment during the year as well. Our price target is $15.25 per share.
Cash Store Financial (CSFS)
Recent price: $6
Price target: $18
Analyst: Greg Garner, CFA
The company provides payday loans and other short-term financial products in Canada, but is expanding into other markets like the U.K. Cash Store Financial could be considered pretty cheap, trading at 4x EV/EBITDA and we think it could be poised for a rebound after three tough quarters of higher costs and regulatory headwinds. Investors should note that it’s also buffered by a 7-percent dividend yield, and we think it could be a solid play on the January effect.
The company serves as a broker for loans, so it doesn't take on credit risk with its own funds. We expect Cash Store Financial to post strong earnings growth in the next few years as it rebounds from the regulatory rate compression, introduces new products, attracts new customers and continues to expand into the UK. Our earnings estimates see growth of 65.1 percent in 2012 and 37.1 percent in 2013, and a 10 percent to 15 percent long-term growth rate is sustainable after 2013. The company also has a history of growing at a greater rate than the industry. Therefore, we believe an 18x to 25x multiple on 2012 EPS is justified in the next year as the company reports progress on several growth initiatives. The company beat our fourth quarter estimates, earning $0.12 per share versus our estimate of $0.06 per share. Revenues also declined 5.2percent to $47.2 million, better than our forecast of a 9-percent decline. Prospects for 2012 include a new product focus for Canadian branches and new branch roll-out in the UK will drive revenues and margins and cash flows should remain strong enough to support the new branch roll-out and dividend.
Market Leader, Inc. (LEDR)
Recent price: $2.45
Price target $4
Analyst: William Jones, CFA
Market leader provides real estate professionals with cloud-based marketing and technology solutions. LEDR offers subscription software; advertising products; tools and training; and online lead generation for real estate professionals. LEDR also provides consumers with free access to information for the home buying and selling process through JustListed.com; HouseValues.com; HomePages.com; and client branded websites. When we initiated, LEDR had posted its first yoy sales growth in over four years (+3% in Q3:10).
We projected accelerating growth from its burgeoning Software-as-a-Service (SaaS) model, which is playing out in 2011 results. More than 80% of sales are now SaaS related vs. 60% in Q3:10. In Q3, LEDR completed two transformational acquisitions – RealEstate.com for $8.25 million and SharperAgent for $1.74 million plus assumed liabilities. Earlier this year, LEDR signed a 5-year agreement with Keller Williams to provide the first lead-to-close, franchise-wide software platform in the industry. The largest agreement in company history is now contributing to accelerating growth with real estate professional customers increasing 40% in Q3. We project that revenue growth near 50% will allow LEDR to reach cash flow break-even by 1H: 12 and positive EPS by the 2nd half. Despite a significant opportunity to grow share of a $9 billion market, LEDR is currently trading at an enterprise value of less than 1x 2012 revenues. We are reiterating our Buy rating and 12-month price target of $4, which is only 1.7x 2012E revenue plus cash and is supported by the attached DCF.
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