Chicago Rivet and Machine Co. (CVR)

About the Company

Chicago Rivet and Machine Co. (CVR) operates in two segments of the fastener industry: fasteners and assembly equipment. The fastener segment manufactures and sells rivets, cold-formed fasteners and parts. The assembly equipment segment is mainly for the manufacture of automatic rivet setting machines. The main market for CVR’s products is the North American automotive industry.

(Source: finviz.com)

Financial Analysis

Chicago Rivet and Machine Co. (CVR)
	2009	2010	2011	2012	2013	TTM	Industry Avg
Profitability Ratio's
ROE (%)	-5.82	2.85	5.77	7.74	10.36	10.77	9.94
ROA (%)	-5.23	2.56	5.17	6.88	9.17	9.24	6.81
ROIC (%)	-5.82	2.85	5.77	7.74	10.36	10.36
Profit Margin (%)	-6	2.12	4.06	5.1	6.68	6.84	14.6
Gross Margin (%)	12.53	19.75	21.51	22.36	23.88	23.98	39.05
Price to Earnings	0	27.9	13.2	10.8	12.9	13.4	25.65
Leverage and Liquidity Ratios						Latest Q
Assets to equity (x)	1.14	1.14	1.14	1.13	1.12	1.17
Debt to Assets (%)	8.30%	8.30%	12.00%	11.54%	10.71%	14.82%
Debt to Equity (%)	9.52%	9.52%	13.64%	13.04%	12.00%	17.40%	200.60%
Times Interest earned (x)	na	na	na	na	na
Times Burden Covered	na	na	na	na	na
Current Ratio	9.14	10.43	8.71	9.11	7.99	5.72	5.69
Acid Test	6.25	7.17	5.64	6.16	5.48	3.9	4.94
Turnover Control Ratios						TTM
Asset turnover	0.87	1.21	1.27	1.35	1.37	1.35	0.61
Fixed Asset Turnover	2.64	3.73	4.02	4.29	4.02	4.09
Inventory turnover	4.25	5.68	5.1	5.24	5.76	5.53	3.55

 

CVR’s ROE has been steadily increasing over the past 5 years and is currently above the industry average. A reason for the increasing ROE has been an increasing profit margin and increasing ROA over the past 5 years. The profit margin is still far below the industry average this is due to a higher cost of goods sold which is reflected in the gross margin. Despite being below industry averages CVR is improving margins and a higher return on assets gives it a slightly higher ROE than the industry average.

Another determinant of financial strength can be seen in CVR’s turnover control ratios. Asset turnover (sales generated by each dollar of assets) has increased by 0.48 over 5 years, so they are earning 48 cents more on each dollar of assets than they were 5 years ago, this is also much greater than the industry average of 0.61. An increasing asset turnover is also a factor in an increasing ROE.

While looking into CVR’s leverage into liquidity ratios it can be seen that assets to equity has decreased over the past 5 years following the same trend as the current ratio and the acid test (quick ratio). This is due to an increase in accounts payable over the past five years, while debt to assets and debt to equity levels are rising and the firm is becoming more leveraged this is not a cause for concern because this is not due to increased debt financing. Another cause for the decreasing current and quick ratio is a decreasing cash account; this is due to a large increase in investments in plant property and equipment, largely due to investing in new cold heading and screw machine equipment. Since CVR has become much more profitable after the end of the recession they have been making large investments into expanding their operations, which have provided additional capacity and production capabilities which could in turn increase future revenues.

CVR is in a very strong financial position and has been taking advantage of its lack of debt obligations and high cash reserves by increasing investments in equipment to provide future increases in revenues.

(Data from: Morningstar.com)

 

Growth Outlook

CVR’s growth depends on the strength of the domestic automotive industry which is forecasted to improve to its highest level since 2007. CVR’s management discusses the fact that pent-up demand, low interest rates, and an improving housing market are all factors that support this view. However due to recent news by the Federal Reserve which could increase interest rates as early as October would have a negative impact on the auto market and by extension CVR. Despite the future increases in interest rates a brighter economic outlook and low historical interest rates have continued to push up auto sales which rose 1.2% in June and achieving its highest selling rate since July 2006. Continued increases in sales of autos will have a beneficial impact on CVR’s revenues, however the long term sustainability of the domestic auto market is in question if interest rates increase in tandem with a decreasing unemployment rate.

Investment Return

For a very rough analysis of investment return I performed both a single factor and two-factor CAPM analysis. For the single factor I used the historical S&P 500 return of 11%, I used the risk free rate as the current rate on 10-year treasury notes (2.58%) and CVR’s beta in relation to the S&P 500 (0.49). Running this through the single factor CAPM analysis I got an expected return of 6.71%

The two factor CAPM was more complicated and is subject to much more debate as the techniques used reflect the global auto industry not the domestic auto industry. The domestic auto industry is the one that affects CVR directly because they sell to domestic manufacturer. The first half of the equation is identical to the single factor CAPM analysis, the second half involved getting CVR’s beta in relation to the auto industry by use of the historical adjusted closing prices of CARZ ETF (Note: CARZ is a global auto ETF, which is one reason why this expected return is not accurate, I performed the analysis mainly for practice).  From this calculation I got an expected return of 8.27%. Again this two-factor model was used in relation to the global auto industry which differs from the domestic auto industry and both CAPM models provided are used only to provide a very rough idea of investment return.

 Discussion

CVR has had a very successful past 5 years, however there progress has been quoted to follow the auto industry which will be heading into uncertain times as soon as interest rates start to climb. CVR could see reduced demand for their product which would lead to decreased revenues. This company is definitely one for the watch list and if the auto industry does start to decrease with increased interest rates then the price could fall for CVR giving way to a great buying opportunity. Due to recent statements by Federal Reserve Chairwoman Janet Yellen increased interest rates might start off slow and later than expected due to her concerns about the strength of the economy, if this is the case then CVR could provide good investment value as the domestic automotive industry continues to strengthen.  

http://online.wsj.com/articles/chryslers-u-s-sales-rise-9-2-in-june-1404216833?KEYWORDS=us+auto+industry

AGCO

AGCO Corp manufactures and distributes agricultural equipment and related replacement parts. Its product mix includes tractors, combines, hay tools, grain storage, etc…  AGCO’s products are under the Challenger, Fendt, Massey Ferguson, Valtra and GSI brands. Their products are distributed in more than 140 countries.

AGCO has maintained a five year revenue growth rate of 12.90% while also having a five year EBITDA growth of 31.60%. This large EBITDA growth was achieved by an improving gross margin over the past five years increasing from 19.18% in 2009 to 22.14% TTM. However this margin is lacking to competitor Deere & Co. (DE) which operates with a 31.90% TTM gross margin.  AGCO has had a huge increase in net earnings over the past 5 years increasing from $135.7 million in 2009 to $578.8 million TTM.

While looking at their balance sheet they are currently holding $193.9 million in cash and have been increasing inventories that have been following their increased net earnings. They have been borrowing more over the past five years; in 2009 they had $454 million in LT debt while they were measured at having $1.0143 billion in the latest quarter (Q1 2014). However this amount of debt can be covered with the 4.397 billion in current assets giving AGCO a current ratio of 1.60. This is not at the preferred ratio of current assets/ liabilities (2:1) and is weaker than the industry average (1.95).  AGCO has been retaining earnings and has seen a 5 year growth rate of 23.45% and has also been growing the total equity of the company (5 year growth rate of 13.8%).  AGCO has a relatively strong balance sheet however they are lacking in their current ratio however this is not much of a problem for the company because they are not highly leveraged (debt/equity ratio of 0.33) as large competitor Deere & Co. (debt/equity of 3.40).

AGCO trades at a P/E of 9.59 compared to the industry which trades at an average P/E of 16.08. They are closer to their 5 year P/E low (7.23) than their P/E high (22.43).

(Source: Finviz.com)

2014 will be a difficult year for AGCO, agricultural commodity prices have declines for much of the past year which translates into lower profits for companies like AGCO. Also according to a pole of farmers around 40% of the respondents reported they would purchase no farm machinery in 2014 (http://www.agweb.com/article/farmers_not_shopping_for_machinery_NAA_Sara_Schafer/). Farmers are less eager to purchase machinery this year with changes to the tax law section 170 which allows for an immediate income write-off for any business asset purchase (new or used) made during that calendar year. The write-off was at an all-time high of $500,000 in 2013, but now it is set at only $25,000 for 2014 (http://www.section179.org/). This will be a factor in farmers not buying new machinery in 2014 which will affect AGCO’s revenue stream.

In the company earnings report the management acknowledged that they were and will be facing challenging markets in 2014. They have said that they will be focusing on margin improvement by efforts on increasing productivity and reducing material costs throughout operations to offset market headwinds. Weaker demand in Brazil hurt their South America margins, sales were negatively impacted by dry weather conditions and also weaker demand from sugar producers. AGCO’s management is expecting production volume to be down 10-15% in the second quarter on a year-over-year basis. For the full year they are planning a decrease of approximately 5% compared to 2013. Target 2014 earnings are approx. $6 per share (down from $6.14 EPS in 2013)

Despite market headwinds AGCO has been returning value to company shareholders by significantly expanding their share repurchase program to $500 million. The lower share count has positively affected EPS by approx. $0.03.

There are very low expectations on AGCO in 2014 and that could be mean it could fall to very appealing levels especially if they are successful in increasing margins. I would wait on AGCO and see if they are successful on increasing their margins while facing market headwinds, if so they would be an attractive long-term buy. 

KBR, Inc.

About the Business

KBR, Inc was incorporated in Delaware as an indirect wholly-owned subsidiary of Halliburton Company. The company is a global engineering, construction and services company supporting the energy, hydrocarbon, government services, minerals, civil infrastructure, power and industrial sectors. KBR offers a range of services through six business units; Government and Infrastructure, Upstream, Services, Downstream and Technology and ventures.

Income

KBE has seen declining revenues over the past 5 years (5yr revenue trend of -11.5%), however amid falling revenues gross margin has increased. KBR is making a larger percentage of gross profit from their revenues despite seeing falling revenues

-          Gross margin 2009 = 6.3%, Revenue = $12,105 (in millions)

-          Gross margin 2013 = 9.7%, Revenue = $7,420 (in millions)

(Source: gurufocus.com)

Revenues have been falling consistently for the past five years because KBR was a major defense contractor active in the Iraq war, since 2011 the revenue coming from the Iraq war have decreased dramatically.  

KBR has also been buying back shares for the past 5 years, an increasing gross margin amid falling revenues and buying back shares makes KBR an attractive look.

(Source: gurufocus.com)

Balance Sheet

KBR is holding on to $1.1 billion in cash, high amounts of cash are needed in the business due to working capital. KBR also only operates with $80 million in LT debt, KBR is not in trouble financially and has a very strong balance sheet.

Another more important item on the balance sheet is that KBR is growing its retained earnings (5yr growth rate of 22.04%) showing that they are profitable and they are able to fund expenditures and dividend payments through earnings that have been retained. Another important item on the balance sheet is that KBR is growing its total equity (5yr growth rate of 4%).

Growth Potential

KBR’s biggest growth potential is with the expected increase in the natural gas market. Wal-Mart, UPS, Coca-Cola, Pepsi and Waste Management are all switching their engines from diesel to natural gas-compressed [CNG] or liquefied [LNG] so they’re also building CNG and LNG fueling stations. In North America we can produce natural gas at a much cheaper price because we have so much of it and we have the better techniques (fracking and horizontal drilling). Natural gas prices are 200-400% higher in the rest of the world so there’s a rush to build LNG export facilities so we can sell to Europe, Asia and elsewhere. Only 6 LNG export facilities have been approved since 2011 but there are more than 24 on deck.

The Situation in Russia and Ukraine helps the U.S. position in the natural gas market. Russia supplies most of Europe with energy; every time Russia gets mad, it threatens to shut off the natural gas. If the U.S. could export our cheaper gas to Europe it would cripple Russia. If enough Democrats get on board LNG export facilities would be built at a much greater pace. In the long run it could represent a massive infrastructure build valued at more than $200B. This is good news for KBR because it earns approximately 40% of its revenue building LNG facilities.

KBR has been awarded 2 new LNG contracts one by Maersk Oil for topsides front end engineering and design (FEED) for the Culzean Project, the other by Gulf LNG Liquefaction Company to FEED engineering and Federal Energy Regulatory Commission (FERC) report pre-filing services to support the addition of ten million metric tons per year of liquefaction and export capabilities to the existing LNG import terminal located in Jackson Country, Miss.

McDermott International Inc. (MDR) would be another play on the expected natural gas production increase, Chicago Bridge & Iron Company N.V. (CBI) is another company that has leverage here as well however the stock is pricey and should wait for a pullback in value

Source: http://seekingalpha.com/article/2206243-how-to-exploit-the-coming-natural-gas-export-explosion-frank-curzio

(Source: FINVIZ.com)

Discussion

KBR is an undervalued company that has the potential for a turnaround. A low valuation that was based on two negative earnings surprises and an error with a financial statement causing a restatement have significantly devalued this company. However this current low valuation, a clean balance sheet, and a new CEO could mark the turnaround for KBR.

Paychex (PAYX)

Introduction

Paychex, Inc. is a Delaware based Corporation formed in 1979. It is a provider of payroll and integrated human resource and employee benefits outsourcing solutions for small to medium sized businesses.

Discussion of Business

Paychex over the past year have been focusing on market segmentation mainly in payroll and retirement services and increased development of franchise and banking services. They continue working on their leading-edge technology and mobility platform by adding more capabilities. Paychex continues to enhance their software-as-a-service “SaaS” solutions, positioning to capture the opportunity from the shift to online and SaaS solutions.

Paychex is in a strong financial position as they have historically have funded operations, capital purchases, business acquisitions, and dividends through earnings. They are currently paying 3.41% dividend and there has been over 10 years of interrupted dividend payments.

Growth Opportunities

New ACA rules provide client growth potential as are the new regulations in Brazil. Paychex has recently announced that they are expanding their payroll and HRS offerings into South America through a joint venture in Brazil, a significant market for the company with a growing economy. Paychex has also announced that they have acquired a payroll provider in Germany working toward increases in revenue, client base and product offerings abroad to capture a greater share of the foreign payroll market

Comparison to competitors

Paychex is a low cost producer of payroll service operating with a low COGS (5yr average of 30.16% of total revenue), they have also seen a declining COGS over the past 5 years. This is compared to their competitor in payroll services Automatic Data Processing (ADP) which COGS is at 59.18% TTM. Through being a lower-cost provider the net margin is broader than competitors

Balance Sheet Analysis

Paychex operates with a current ratio of approx. 1.11. Paychex has a very clean balance sheet with no debt while the company has also been growing its equity over the past 5 years with a 5yr growth rate of 7.18%

Conclusions

While Paychex is a very profitable company and one that operates with a strong financial position it trades at 25 times earnings and over 8x book value. Paychex is a company with growth potential however and will show increased revenues with their expansion into foreign markets. My conclusion is that it is a profitable company that seems to be under capable management however it is pricey at their current valuation for a company that is averaging a 5% growth rate

Go-Pro Financial Analysis

Go-Pro the popular camera company have recently filed an S-1 with the SEC and I have conducted a brief financial analysis on the company with the information that they have provided and conclude the following.

Go-Pro financial analysis

Income Statement

Gross Profit

2010 = 50.80% of revenue

2013 = 36.70% of revenue

R&D

2010 = 4.3% of gross profit

2013 = 20% of gross profit

Operating Expenses

2010 = 32.40% of gross profit

2013 = 72.72% of gross profit

4 yr EPS (diluted) .24 per share

Price based on PE of 15 and 4yr average EPS = $3.60

Price based on PE of 15 and most recent EPS (0.47) = $7.05

Net profit Margin

2011 = 10.51%

2013 = 6.15%

I wasn't too thrilled on the income statement, they are increeasing revnues and increasing net income yearly but they are also having costs increase at a faster rate. They sid in the report that they are facing higher product costs which have increased more than their selling prices. I think that based on their earnings they will sell at a huge premium when they go public unless they can find ways to cut their expenses

Balance Sheet

Cash

2012 = 36, 485

2013 = 101,410

Total assets

2012 = 246,665

2013 = 439,671

LT debt (and current debt) as of March 31, 2014 = 110,666

They're sitting on a lot of cash which I like and seem to increasing that cash amount mostly through changes in assets. But I think my concern would still be whether their expenses are still going to be increasing, I think if that is true then it shows that they are in a highly competitive industry. I think that because this technology is seen as popular people will buy it causing it to be priced at a huge premium but I don't think their earnings both current and average justify a price above $12 if they keep increasing their expenses. 

Walter Schloss 16 Steps To Make Money On Wall Street

(All of the following information was received during a Gurufocus.com webinar "Replicating the Investing Technique of Walter Schloss)

Walter Schloss was a very successful investor who was a student of the investing legend and "father of value investors" Benjamin Graham. Walter Schloss advocated to buy for value, diversify adequatley (extreme diversification is not needed) and to be patient. Walter Schloss rarely talked to management as he thought they pull a curtain over investors and did not like Phillip Fisher's "Scuttlebutt" method which is partially employed by Warren Buffett.

Walter Schloss advocated for looking at assets (book value) rather than focusing on the income statement. His reasoning behind this is that asset value fluctuate more slowly than you see in the income statement. Earnings are very difficult to predict and most analysts are often off on their earnings predictions. Schloss bought at low price/book ratios. When he did look at earnings he liked low prices to normalized earnings which are earnings that are averaged out over a number of years.

Like most other value investors Schloss like stocks with long histories and track records (15-20 years). A adeqately diversified, cheap basket of stocks was his strategy for risk reduction. He often owned 60-100 stocks at one time, had a maximum concentration fo 10% of his portfolio towards one stock, and his average holding period for one stock was about 4 years. His buying guidlines were that he typically bought stocks tha were around 1/2-2/3 of book value. During this period intangible assets weren't as large on the balance sheet as they are today. Intangible assets and Goodwill sometimes are worth deducting from the balance sheet, however there are circumstances such as Coca-Cola where they are worth more than their market cap due to their extremely strong brand. Schloss would pay up to book value or slightly over, but would never pay 2x book value. He especially looked for "unloved" areas of the market, or Inudstries that are lagginf in p/e when compared to the rest of the market. He would also look for individual companies that had lost a lot of their value, trading near their 3 year low Schloss never bought financial companies because he thought that their balance sheets were difficult to read and prefered simpler balance sheets and financial statements.
When Schloss would buy stocks he never invested the full amount immediatly but averaged in his investment amount. For example if he wanted to dedicate $10,000 to one stock, he would buy $5,000 worth and then over time average the rest of the amount in.

Below are Walter Schloss' 16 Steps to making money on the stock market

o   1. Price is the most important factor to use in relation to value

o   2. Try to establish the value of the company

§  Remember that a share of stock represents a part of the business and is not just a piece of paper

o   3. Use book value as a starting point to try to and establish the value of the enterprise

§  Be sure that debt does not equal 100% of the equity

§  Capital and surplus for the common stock

o   4. Have patience, stocks don’t go up immediately

o   5. Don’t buy on tips or for a quick move

§  Let professionals do that, if they can

§  Don’t sell on bad news

o   6. Don’t be afraid to be a loner but be sure that you are correct in your judgment

§  Can’t be 100% but try to look for weakness in your thinking

§  Buy on a scale and sell on a scale up

o   7. Have the courage of your convictions once you have made a decision

o   8. Have a philosophy of investment and try to follow it

§  Above way is successful

o   9. Don’t be in too much of a hurry to sell

§  Of the stock reaches a price that you think is a fair one, then you can sell but often a stock because a stock goes up 50%, people say sell it and button up your profit

§  Before selling it try to reevaluate the company again and see where the stock sells in relation to its book value

§  Be aware of the high level of the stock market

·         Are yields low and p/e ratios high/ if the market historically high

·         Are people optimistic?

o   10.When buying a stock

§  Helpful to buy near the low of the past few years

·         Stock may go as high as 125 and then decline to 60 and you think it is attractive

·         3 years before the stock sold at 20 which shows there is some vulnerability to it

o   11. Try to buy assets at a discount than to buy earnings

§  Earnings change dramatically in a short time

§  Usually assets change slowly

§  Have to know more about the company in order to buy earnings

o   12. Listen to suggestions from people your respect

§  Doesn’t mean you have to accepts them

§  Remember it’s your money and generally it is harder to keep money than to make it

·         Once you lose a lot of money it is hard to make it back

o   13. Try not to let your emotions affect your judgment

§  Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks

o   14. Remember the work compounding

§  For example if you make 12% a year and reinvest the money back, you will double your money in 6 years, taxes excluded

§  Remember the rule of 72

o   15. Prefer stocks over bonds

§  Bonds will limit your gains and inflation will reduce your purchasing power

16. Be careful of leverage. It can go against you

-       

Renewable Energy Group (REGI)

Company Overview

Renewable Energy Group is a leading North American Biodiesel with a nationwide distribution and logistics system. They are focused on converting natural fats, oils, and greases into advanced biofuels and on converting diverse feedstocks into renewable chemicals. They use lower cost feedstocks that will not have any impact on the price of food unlike some of their competitors.

Company Financials

Stock price is currently at 70% of its book value. Cash and short term investment have been increasing since 2008. Short term debts have increased in the past year however with a current ratio of 3.54 the company will have no issue in paying off short term liabilities. Liabilities have increased during 2013 however that was due to upgrade costs of two bio-refineries. Net margins increased greatly over the past year from 4.28% in 2012 to 11.03% in 2013 ranking higher than 75% of companies in its industry. Return in equity has also been increasing from 29.23% in 2012 to 36.13% in 2013 ranking higher than 68% of companies in its industry.

Ranking provided by: http://www.gurufocus.com/stock/REGI  

Source: http://financials.morningstar.com/ratios/r.html?t=REGI

2013 Results

 In 2013 Renewable Energy Group sold 37% more gallons of biodiesel, increased revenue by 48%, increased gross profit to 16% from 6%, increased its adjusted EBITDA by 54%. Its 4Q13 operating highlights were listed as

-          Increased sales by 89.9% when compared to 4Q12

-          80.9% production increase compared to 4Q12

They announced in October spending of $30 million to further upgrade REG Mason City to allow the plant to produce high quality biodiesel from lower-cost raw materials like inedible corn, expected to be completed in 2014 and will not materially interrupt production. This upgrade follows REG Albert Lea biorefinery successfully completed in September; 4Q13 represented the first full quarter of flexible multi-feedstock operations at REG Albert Lea

Renewable Energy Group enhanced its distribution capability by completing a new barge-loading facility at REG Seneca, this compliments truck and rail shipping capabilities and enables a lower-cost method to ship biodiesel through inland waterway system

 In January Renewable Energy Group announced entry into industrial biotech and the renewable chemicals market with its acquisition of LS9, inc. REG Life Sciences now can convert diverse feedstocks into a wide range of valuable chemicals, a cornerstone investment for REG Life Sciences.

Source: Renewable Energy Group 2013 Annual Report

Risks

The cost of raw materials used as feedstocks are volatiles and results of operations could fluctuate substantially. Loss or reductions of governmental requirements for the use of biofuels could have a material adverse effect on revenues and operating margins, they believe that increased demand for biodiesel since July 2010 is directly attributable to the implementation of RFS2 which requires that a certain volume of biodiesel be consumed

In December 2013, total long-term debt was $27.15 million. Subjects them to potential defaults, could adversely affect ability to raise additional capital to fund operations and limits ability to react to changes in the economy/ biodiesel industry

Source: Renewable Energy Group Annual report 2012

Conclusion

Renewable Energy Group seems to have a good forward looking focus that is aiming at cutting costs to improve the company’s margins. In relation to its risk factors the long term debt of the company is an issue if there are changes within the industry or economy that the company needs to react to quickly like RFS2 which the company relies on for its demand of biodiesel fuels. Renewable Energy Group is in good financial health and it not yet selling at its book value. The stock seems to very volatile and would be one worth looking into when it takes another dip in price. 

Guaranty Federal Bancshares (GFED)

Guaranty Federal Bancshares

Company Overview

Founded in 1913 in Springfield Mo, Guaranty offers a wide range of products for both individuals and local-area businesses. It is found in 9 different locations, has 100+ area surcharge-free ATMs and offers its BaZing checking, a value checking account that offers discounts on on shopping, dining, and traveling, cell-phone protection, vision, and hearing savings, as well as a number of other benefits, for a monthly service charge.

Investment Attractiveness Qualities

Guaranty has increased its net margin and ROE over the past 3 years and it currently selling at 60% of its P/B value with a price target of $30. With a P/E ratio of 7.03, and a Debt/Equity ratio of 0.31, it is low on debt and has a lower P/E than competitors in its industry. The bank is earning a 26.90% return on its interest. The bank’s net margin also looks to be increasing in the past 12 months being now at 17.40% (ttm)

On its balance sheet, cash and accounts receivable been increasing over the past 2 years while debt/equity has been decreasing over the past 2 years. Cash flow has been increasing over the past two years while long-term debt liabilities have been decreasing.

Sources: Morningstar.com, Finviz.com

                In Guaranty’s 2013 fiscal year results net income increased from $1,944,000 in 2012 to $5,240,000 in 2013. Non-interest expense decreased by $499,000 due to received proceeds on an insurance claim related to a loss on deposit accounts that was recognized in the first quarter of 2013. The bank also reduced its nonperforming assets to $19.9 million (Dec. 31, 2013) from $22.5 million (Sept 30, 2013). This will continue to be a focus of the bank as said in their annual report. Guaranty has seen improvement in net margin and profitability given a challenging operating environment. There has also been multiple insider buying at the beginning of February (2/4/2013)

Sources: http://www.marketwatch.com/story/guaranty-federal-bancshares-inc-announces-preliminary-2013-financial-results-2014-01-21

Risks

                The bank has a very high P/E to growth ratio (36.60). There has also been recent selling by one insider in the company although this could prove to be nothing serious. There is weak loan demand and continued low interest rates that the bank faces. There has been a decline in loan balances and increased competition in loan pricing which has significantly elevated the challenge to improve or maintain the loan yield. Long term interest rates are also increasing which has been reducing consumer demand for long-term secondary market mortgage loans which in turn has decreased Guaranty’s non-interest based income. This mortgage interest level is expected to remain or increase higher than its current level which means that the secondary market will remain a challenge compared to income in recent quarters.

Sources: http://www.marketwatch.com/story/guaranty-federal-bancshares-inc-announces-preliminary-2013-financial-results-2014-01-21

Conclusion

                Guaranty Federal Bancshares seems to be an undervalued bank that is selling at 60% of its book value. With a price target of $30 it seems to be an attractive investment. Adding to that fact is that since the bank has been around since 1913 it has survived major economic collapses such as the Great Depression and our most recent recession. The risks attached to the bank are increased competition in loan pricing with a continued low interest rate. However they have greatly increased their net income in 2013. This stock has levelled off since a drop in its price in July 2013 but might be set for an increase due to improved performance. However with increased competition while still operating in a weak economy it will be one to keep an eye on.

Genworth Financial

Company Overview

                Genworth financial is an insurance company that provides services in three areas: retirement and protection, U.S. mortgage insurance, and international. Their products include life and long-term care insurance, mortgage insurance, lifestyle protection insurance, and annuities. They are a 9.5 billion dollar global insurance agency that ranks among the fortune 500 companies.

Company Highlights

New company CEO as of January 1^st 2013, Thomas McInery he is well liked by analysts and has a wealth of knowledge in the field. He is currently leading the company in its turnaround. Genworth hit its goals for the 2013 period, they are holding company cash greater than 1.5X Debt service with a $350MM buffer, addressed near term debt maturities, ratings are “stable”, maintained margins in LTC (long term care) reserves and are restructuring actions to reduce expenses.

Currently starting their transition to growth stage, expecting moderate recovery across the U.S. economy with slightly below average GDP growth, a slow decline slow decline in unemployment, modest home price appreciation, and modest increase in 30 year fixed rate mortgage

                Aspires to have a 7-9% ROE by 2016. In 4Q13 net operating income increased 20% versus prior year. Company said to have made “progression on strategic objectives from 2013”. International MI performance was up 12% sequentially on lower losses with improved capital positions in Canada and Australia. U.S. MI earnings up $9MM, up $38MM from prior year on improving losses from lower delinquencies and continued improvement in the housing market. U.S. life insurance up 63% versus in the prior year. $400MM capital raised and dedicated for anticipated increase in U.S. MI capital requirements

Data source: Company financials and annual report

Why Buy

                A fortune 500 company that is currently trading at 50% of its book value that successfully saw through its stabilization goals. Net income has been increasing over the past 2 years. Earnings per share increased from $0.25 in 2011 to $1.04 (ttm). Net margin increased from 1.18% in 2011 to 5.26%ttm since company turnaround. ROE increased to 3.34%ttm. Solid company that has had an excellent management change that is undervalued currently entering their company growth period.

Data source: http://www.morningstar.com/