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Stock Picks Bob's Advice
Tuesday, 31 May 2005
"Revisiting a Stock Pick" American Vanguard (AVD)

Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice. As always, please remember that I am an amateur investor. So please consult with your professional investment advisors prior to making any investment decisions based on information on this website!

I was scanning the lists of top % gainers today on both the NASDAQ and NYSE, but didn't find much to pique my interest. However, taking a look at the list of top % gainers on the AMEX, I came across an 'old name', American Vanguard (AVD) that as I write is trading at $18.00, up $.82 or 4.77% on the day.

I first posted American Vanguard on Stock Picks on December 29, 2003, when it was trading at $38.69. AVD has had two stock splits since that post: a 3:2 split on 4/19/04, and a 2:1 split on 4/18/05, making our effective pick price actually $12.90, thus the stock has actually gained $5.10 or 40% since being "picked" on the blog! Unfortunately for me, I never purchased any of these shares, and do not currently own any shares or options on this company.

According to the Yahoo "Profile" on AVD, American Vanguard "...operates as a diversified specialty and agricultural products company. It develops and markets products for crop protection and management, turf and ornamentals management, and public and animal health. The company provides chemicals that include insecticides, fungicides, molluscicides, growth regulators, and soil fumigants...."

As my regular readers will note, one of my first "screens" in picking a new stock is to check the latest quarterly result. Simply put, I am looking for increasing earnings in conjunction with growth in revenues as well!

On May 5, 2005, AVD announced 1st quarter 2005 results. For the quarter ended March 31, 2005, net sales rose 20% to $41.2 million, net income was up 42% to $3.1 million or $.16/diluted share, from $2.2 million, or $.12/diluted share the prior year. This was a solid quarter for the company!

Having established that the latest quarter was great, I move on to Morningstar.com and try to see if the company has been doing well for the last few years as well. Why is this important? It is my experience, that a company may well have an overall momentum. That is, if the company is doing well the last several years, did well the latest quarter, it is probably more likely than random chance, to continue to do well! Whether this is due to the particular niche the company sits in, the management, or a combination of many other factors is not material to me.

On Morningstar, I have been using the page where the "5-Yr Restated" finances are located. For AVD, this is located here.

Looking at this Morningstar page, we can start at the top and review the revenue growth. This is illustrated as a series of purple "bars" on a chart, which moving from left to right, shows the progression in revenue growth from $78 million in 2000 to $150.9 million in the trailing twelve months (TTM).

This consistent revenue growth is quite impressive!

What about the earnings? A few lines lower, we can see that earnings/share have grown consistently from $.24/share in 2000 to $.76/share in 2004. Again a pretty picture!

In fact, this company even pays a dividend, and has been increasing its dividend from $.01/share in 2000 to $.03/share in 2001, $.04/share in 2002, $.05/share in 2003 and $.07/share in 2004. The fact that this company, as small as it is, pays a dividend and has been increasing its dividend regularly makes the stock attractive as well!

What about "free cash flow". I am not an accountant, but in simple terms, I understand this to be the amount of real "cash" that this venture is producing. I insist on positive free cash flow in stocks I like, and if possible, growing free cash flow. AVD was free cash flow even at $0 in 2002 and 2003, but had $7 million in free cash flow in 2004.

The last bit of data I use on this Morningstar sheet is a look at the balance sheet. Again, I am not an accountant but my understanding of entries is that assets are things that you own and liabilities are things that you owe! Current means that they are either due or available within 12 months, and long-term means the same but greater than 12 months.

For my purposes, I love seeing lots of assets and very little liabilities :). I prefer to see lots of cash, but if there are lots of current liabilities, this is almost as good.

In AVD's case, the balance sheet on Morningstar shows $500,000 in cash and $73.6 million in other current assets. This is balanced agains $37.6 million in current liabilities (easily covered), and $20.6 million in long-term liabilities. Clearly the current assets are significantly larger than both the current liabilities and the long-term liabilities combined! This is a plus for me.

My next step in looking at a stock is to think about "valuation". There are many ways to "value" a stock. I look at three basic indicators for this blog, the P/E which is the Price compared to the Earnings on a trailing basis, the PEG, and the Price/Sales ratio.

The less you have to pay for a given amount of earnings, the more "value" you have in each stock purchased. Thus, the lower the P/E, in general, the better the value.

However, in a growth stock, if the next year and the year after is anticipated to bring HUGE earnings growth, then obviously, an investor will be more willing to pay for a stock with less significant current earnings results. Thus, we have the PEG ratio, which looks at the earnings growth rate, relative to the P/E. For instance, if a stock is estimated to be growing at 25%/year in earnings the next five years, and the P/E is 25, then the PE/G or PEG ratio would be 1.0. I hope you follow!

For AVD, we can check the Yahoo "Key Statistics" on American Vanguard. Here we can see that this is a small cap stock (under $500 million) at a capitalization of $326.33 million. (Market capitalization is calculated by figuring out the value of the entire company if you multiplied the current price/share by the number of shares outstanding).

The P/E is moderate at 22.35, with a forward p/e of 17.90 (fye 31-Dec-06). No PEG is reported. I suspect that this is due to the small size of this company and the relatively limited number of analysts who probably follow this stock.

Price/Sales is 1.98. This ratio is calculated by dividing the entire sales of the company by the number of shares. This is a valuation statistic that is most useful when comparing the company to other companies similar to it. In other words, other companies in the same "industry group".

I use information from my Fidelity.com account to get other companies in the same group. And actually, AVD is a bit "pricey" relative to the other companies in the "Agricultural Chemicals" group. Syngenta (SYT) is at 1.6, Scotts Miracle-Gro (SMG) is at 1.1, Agrium (AGU) is 0.9, Central Garden (CENT) is at 0.7 and Bunge (BG) is cheapest at 0.3.

Yahoo also shows that there are 18.23 million shares outstanding. 1.76 million of these shares are out short (as of 4/12/05). Yahoo states this is 204.60% of the float...but that doesn't make much sense imho. However, the short ratio is still gigantic at 38.1, with my 3.0 days as being significant. If we are in the midst of a "short squeeze" with 27,281 shares on average being traded....we could really see this stock price spike!

As I have noted, this stock does pay a small dividend of $.16/share yielding 0.88%, and the last stock split was just last month when the stock split 2:1 on 4/18/05.

How about "technicals"? I prefer the "point & figure" charts from Stockcharts.com. These charts give a feeling for the ebb and tide of a stock price, that is the 'o's' show declines in stock price and the 'x's' show increasing stock prices.

The AVD "point & figure" chart:


the chart looks strong with a large run up from $.88/share in March, 2003, to the current $18.00 level. I am not a technician, but just like I prefer growing companies, I prefer to see charts that appear to be moving higher in a steady fashion!

So what do I think? Well, this is not exactly what I would call a "green" stock, insofar as environmental issues are concerned, but the company looks green to me insofar as generating lots of $'s in both revenue, growth, and free cash flow! The valuation appears reasonable, although the Price/Sales ratio puts it at the top for valuation in its group. There is also an amazing # of shares out short....either they know something that I don't or they are going to be hustling trying to find a share to buy to cover their pre-sold shares! The chart also looks strong.

If I were in the market to buy a new position, this would be the type of company I would be adding to my own portfolio!

Thanks so much for stopping by! I hope that my more indepth explanation was helpful for some of you and didn't bore the rest of you to tears. :).

If you have any comments, questions or words of encouragement, please feel free to email me at bobsadviceforstocks@lycos.com.

Bob









Posted by bobsadviceforstocks at 3:48 PM CDT | Post Comment | Permalink

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