Insiders Weigh in on Growth: It’ll Measure Up After All
By
Michael Brush
July 07, 2005
For a company that makes money designing and selling all kinds of sensors,
(Measurement Specialties,
MEAS) sure
doesn’t do a very good job of gauging the skittishness of investors.
The company guided quarterly earnings estimates down by less than 5% in
mid-May. That’s a small amount – but it sparked a sell off that sent its
stock tumbling to $19.50 from $24 in less than two weeks.
Measurement Specialties stock recovered almost as quickly. But not before
insiders, including chief executive Frank Guidone, loaded up on $569,000
worth of shares for around $21.30 in mid-June, according to Thomson
Financial. Purchases by line officers like chief executives are considered
particularly telling, since they are close to the business.
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What’s next?
We’ve already missed the initial follow through since insiders bought –
since the stock recently jumped to $24. So what next? Throw in the towel and
move on?
I don’t think so. Generally, insiders don’t buy for a short-term trade. And
they typically buy well ahead of positive trends they foresee. So I sense
there’s still some healthy upside in this stock over the next year or more.
Measurement Specialties gets about 72% of its revenue from selling sensors
that measure everything from vibrations in pacemakers, to the weight of
passengers in cars (needed to adjust airbag settings), to pressure in
heating and air conditioning systems.
The rest of the company’s revenue comes from a consumer products division
that sells things like scales, tire pressure gauges, and tape measures that
gauge distances with a sonic signal.
Sources of growth
This may sound like a relatively boring product lineup. But there’s some
potentially exciting growth ahead for this company for the following
reasons.
-
Measurement Systems can continue to grab market share by offering
lower prices, since it has low-cost manufacturing facilities in China
-
The company has a solid staff of engineers and a broad technology
profile that will help it keep coming up with innovative designs
-
It will cut costs as it continues to digest about a half dozen
small acquisitions made in the past year
-
The demand for sensor will grow as more mechanical devices are
converted to computerized devices
Measurement Systems should also continue to make acquisitions that
build out its product line and customer base. Since the company has solid
cash flow, it probably won’t have to issue new shares – which would dilute
the existing share base -- to make those acquisitions, says Guidone.
He thinks the company can borrow up to three times its annual cash flow,
expected to be about $30 million this year. The company already has $25
million in debt. That leaves room for about $50 million in borrowing to fund
acquisitions – about the same amount it spent in the past year.
Gauging the growth prospects and valuation
The company expects its sensor division to see a healthy 20% revenue growth
in the next year, followed about 15% annual revenue growth for a few years
after that. Acquisitions would add more growth. But earnings will grow even
faster – because sales will be growing faster than costs.
The consumer products division should see relatively modest 5% annual
revenue growth in the medium term. That’s one reason that division will
likely be sold or restructured over the next three years.
All told, analysts expect 20.8% annual earnings per share growth in the
medium term, according to Thomson Financial.
Analysts think the company will earn $1.50 in the next four quarters. So at
$24 per share, it trades for 16 times forward earnings. That gives it a
price earnings to growth (PEG) ratio of .77.
This suggests the stock is cheap. As a general rule of thumb, growth stocks
are considered to be “fairly” valued when they have PEG ratios of 1 to 1.5 –
though Measurement Systems deserves some discount because it is a small cap
stock with a market cap of $328 million.
The bottom line: Yes, insiders got a better deal than we did, with
purchases just above $21. But given the growth prospects for this company,
it’s still a buy right here. Analysts have 12-month price targets in the $32
to $34 range. Patient investors might see a pullback to $23, which now looks
like a support level.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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