2010: The Year of the Strong Grid? Part III
Two Strong Grid Stocks in Hiding
Tom Konrad, CFA
A look at two transmission (or
"Strong Grid") stocks I missed previously: EMCORE Group and AZZ
In part I of this series, I made the case that 2010
might be the year that transmission stocks caught investors'
attention, as smart
stocks did in 2009. In part II, I
looked at the transmission stocks in our Electric
list, and compared their financial strength.
My initial screen, based on Current ratio, Cash on Hand, Debt, Cash
from Operations, P/E ratio, and dividend yeild allowed me to narrow the
list down to Valmont
International (JST), General
(BGC), MasTec (MTZ),
International (WCC) as stocks worth further research. I'm not
buying any of these now, because I believe the market as a whole
nosedive at any time. It could also keep trending up for a
while, but, on the whole, the possible upside gains do not seem
sufficient compensation for the downside risks.
I particularly liked Valmont, because it has a high current ratio,
no significant debt, and pays a small dividend. A reader
suggested that if I liked Valmont, I'd like EMCORE
Group (EME) even better. So how does it compare?
Valmont has a 2.6x current ratio, can pay off its debt instantly with
cash, has 12.2 trailing P/E ratio (Q4 09), and pays a 0.8%
dividend. Emcore's current ratio is 1.45x, which is on the low
(i.e. poor) end for the stocks in the group, could instantly pay off
its debt, has an 11.7 trailing P/E (Q4 09), and does not pay a
dividend. (Note that I used Q3 09 numbers in Part II; these
were what was available at the time of writing.)
EMCORE's weaker current ratio and lack of a dividend don't make it
more attractive than Valmont. A little more digging also turned
up another problem with EMCORE: electric transmission seems to be only
a small fraction of their overall business. This general
mechanical and electicial construction group seems to get less than 20%
of its revenues from transmission, quite possibly much less.
Further, as a construction firm, the best of the five companies above
to compare it to would be MazTec, which is also a contractor, as
opposed to an industry supplier like Valmont. MasTec also is not
a pure play, and probably only gets about 1/3 of its revenue from
electrcical transmission work, but MazTec sees transmission as key to
the company's future growth. If it weren't for the lack of
transmission focus, EMCORE would compare favorably to MasTec, which has
an only slightly higher current ratio (1.6x), would need a couple of
years to pay off its debt using internally generated cash, has a
slightly higher trailing P/E (13.3), and also does not pay a dividend.
In short, EMCORE Group probably is not a very good way to invest in
the Strong Grid.
I'd run across AZZ
Incorporated (AZZ) before, but had neglected to add it to the Electric
list, and didn't think of it when I was compiling the "Strongest
Stocks." This time, I came across it on StockGumShoe, where Travis
Johnson investigates the paid stock newsletter teases. If that
sounds familiar, it's because we republished an
here in January. Motley Fool's Hidden Gems has
apparently been teasing a stock which will save us from the implosion
of the electric grid, and Travis
case that it's AZZ.
One othe the things I like about Travis's work is that he also goes
into a good deal of depth looking into the same sorts of indicators I
find interesting about companies after he ferrets them out. He
has this to say about AZZ:
This one actually looks pretty appealing
to me, as long as you’re
not too impatient — they’ve got a price/sales ratio of under 1, but
still manage to run a double digit profit margin, which is fairly
unusual (though that margin might shrink), and they do appear to have a
pretty strong national business with their large number of
manufacturing and galvanizing plants, so they’re not completely stuck
riding the regional trends if one of their areas sinks further into
The forward estimates by analysts are for
very strong growth in the
next several years, which gives them a price/earnings/growth (PEG)
ratio of .59, which usually indicates a screaming value — but I’d be
cautious about those future growth estimates. [There's much
Here they are (using Q4 09 data. Price data as of 2/10/10.) Note that most of the P/E's have dropped partly due to higher earnings in Q4 09 than Q4 08, and partly due to price declines in the last month.
|Company||Current Ratio||T (see
|AZZ Incorporated (AZZ)||4.06x
|General Cable (BGC)||2.1x||instantly||11.34
|Jinpan International (JST)||2.3x||instantly
|MasTec (MTZ)||1.7x||2 years||13.35||0|
|Valmont Industries (VMI)||2.6x||instantly||12.2||0.8%|
DISCLOSURE: Long BGC.
DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.
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