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 remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.
I have been spending some time discussing my various trades on this blog and I wanted to see if I could post a stock this afternoon that I don't own yet I still believe deserves a spot on this website.
MATRIX SERVICE COMPANY (MTRX) IS RATED A BUY
There are certainly many different ways to select a stock for a possible purchase. Using Matrix Service (MTRX) as an example, let me once again go through the process that I use to identify possible 'winners' in the stock market.
My first screening device is to utilize the lists of top % gainers. I probably most often screen through the list of gainers on the NASDAQ, but l also will check the NYSE list and the AMEX list as well.
You might ask 'why use this list of all things?' I don't have a very good answer, but it has been my experience that stocks that show up on these top % gainers list, if they have good underlying fundamentals may well be on the way to additional gains.
Anyhow, checking the list of top % gainers today on the NASDAQ, I came across Matrix Service Co (MTRX) which closed today at $24.40, up $3.00 or 14.02% on the day. I do not own any shares of MTRX nor do I have any options.
What exactly does this company do?
According to the Yahoo "Profile" on MTRX, the company
"...together with its subsidiaries, provides construction, and repair and maintenance services primarily to the downstream petroleum and power industries in the United States and Canada. Its construction services include turnkey construction, civil construction, structural steel erection, mechanical installation, process piping, electrical and instrumentation, fabrication, vessel and boiler erection, millwrighting, plant modifications, centerline turbine erection, and startup and commissioning. The company also offers design, engineering, fabrication, and construction of aboveground storage tanks. Matrix Service Company provides its construction services to the downstream petroleum market, which includes refineries, pipelines, terminals, petrochemical plants, gas facilities, and bulk storage facilities."
I don't need to remind any of my readers of the recent ascent of the price of oil which closed at $93.31, up $2.25 on the day today. Intuitively and thus with a sort of Peter Lynch investing approach, I believe that stocks like MTRX that are dependent on investment in refining, storage, and transportation of petroleum products will benefit from the higher price of oil. Even while all of us consumers have to pay at the pump :(.
At this stage of my 'selection process' I have merely identified a stock that has moved higher today and has an interesting business. But that isn't even close to fulfilling all of my criteria, what I call my 'profile' of an 'investable stock'.
My next step is to examine the fundamentals of the company involved. I want to find out how the company did in the latest quarter and if that successful performance has been a continuation of similar financial performance in the past. This is more or less my search for a company with persistence of good results.
How did Matrix do in the latest quarter?
Generally, I am looking for a company with growing earnings, growing revenue, that can possibly beat expectations and raise guidance. That's a lot to ask out of a report. I don't always get it all, but let's see how MTRX did in their latest reported earnings report which was a first quarter 2008 report anounced on October 4, 2007.
In this 1st quarter report, for the quarter ended August 31, 2007 (please note that a company can set its financial year to any month. Many do use the calendar year, but this company obviously starts midway on June 1st for its fiscal year.), the company reported that revenue climbed 27.1% to $161.3 million from $126.9 million in the same quarter last year. Net income came in at $6.3 million, up over 100% from last year's $3.0 million. Fully diluted earnings per share came in at $.23/share up nearly 100% from last year's $.12/share result. These results were to say the least very strong.
As this separate AP Story notes, the company came in at $.23/share for the quarter, and analysts expected $.19/share, thus they did indeed beat expectations. The company, instead of raising guidance, reiterated guidance of $700 to $750 million in revenue for 2008. Still a strong result.
So Matrix had a great latest quarter. But that still is not enough for me.
What has been the longer-term results for this company?
I have found the Morningstar.com "5-Yr Restated" page the most helpful for evaluation of 'persistence' of results. For Matrix, as we often find with relatively small companies, results are slightly erratic, but overall the trend is clear. The company is growing and improving its performance steadily.
Revenue, which jumped from $288.4 million in 2003 to $607.9 million in 2004, otherwise has grown steadily to $639.9 million in 2007 and $674.3 million in the trailing twelve months (TTM).
Earnings have also been a bit erratic, declining from $.37/share in 2002 to $.25/share in 2003 before jumping to $.54/share in 2004. But earnings dipped to $(2.24)/share in 2005, before once again turning profitable at $.35/share in 2006 and $.81/share in the TTM.
I prefer to see stable or declining shares in general, but growth in outstanding shares is acceptable if the company has been otherwise growing its revenue and earnings even faster. In this case outstanding shares have increased from 15 million in 2002 to 20 million in 2006 and 24 million in the TTM. This 60% increase in the float has been accompanied by an almost 400% increase in revenue and an approximately 125% increase in earnings. From my perspective, this is acceptable.
On this page, I also review the free cash flow. This is the amount of cash that is being 'created' by the enterprise. During the tech bubble of the 1990's, it was common to discuss the 'burn rate' of companies, estimating the rate of consumption of available cash before all of the money was used up. In my perfect world of perfect companies :), I would prefer to see positive and growing free cash flow. At a minimum, I insist on positive free cash flow by itself. In the case of MTRX, the cash flow has improved from a negative $(33) million to $3 million in 2005, $30 million in 2006 and $4 million in the TTM.
Finally, when examining this Morningstar.com page, I want to at least briefly examine the balance sheet. I do not pretend to be an expert at this or anything else I have discussed. But this is the process I use to identify my stock picks. Again, keeping it simple, I am looking for stocks that have more assets than liabilities. Now that wasn't too hard was it?
More precisely, I want to find stocks that have more current assets than current liabilities, and possibly more current assets than total liabilities which is the combination of current and long-term liabilities combined. Think of current and long-term as descriptors explaining whether the cash amount in consideration is either available easily in the next twelve months or needs to be paid in the same period of a year.
The comparison of the total current assets to the total current liabilities is called the current ratio. Different authorities have different criteria of identifying what is 'good' or not in this ratio. Generally I have kept to a cut-off of about 1.25 for a 'good' current ratio. Higher ratios are even more financially 'healthy' from my perspective.
In the case of MTRX, Morningstar.com reports them with $7 million in cash and $140.6 million in other current assets. This level of current assets is actually enough to pay off both the $94.1 million in current liabilities and the $21.6 million in long-term liabilities combined. Calculating the Current ratio we have $147.6/$94.1 million = 1.57. A completely adequate level of assets to liabilities from my perspective.
Working through this process, I like to examine some valuation numbers. That is what kind of a value stock does this investment represent?
What about some valuation numbers for this stock?
I once again turn to Yahoo for these numbers. In particular, I utilize the Yahoo Key Statistics which for Matrix is here. Some of the numbers I like to examine include the 'size' of the company in terms of market capitalization. In particular, Matrix is a small cap stock with a market cap of only $649.04 million.
The trailing p/e is reasonable from my perspective at 28.57. Based on estimates, the forward p/e even looks nicer at 16.94. There aren't enough analysts out there making predictions about earnings results long-term to help us determine the PEG ratio (5-yr expected). But certainly, if anything like the current growth rate in earnings continues, this should be well under 1.0.
The Price/Sales ratio is another nice way of looking at a stock. According to the Fidelity.com eresearch website, MTRX is an outstanding value with a Price/Sales (TTM) ratio of only 0.78 compared to the industry average of 3.40. However, according to Fidelity, at least as measured by the Return on Equity (TTM) ratio, Matrix doesn't do quite as well with a ROE (TTM) of 19.51% compared to the industry average of 28.97%.
Finally, returning to Yahoo, we can see that there are only 26.60 million shares outstanding with 26.41 million that float. As of 11/27/07, there were 1.58 million shares out short representing 6% of the float or 4.9 trading days of volume. This days of trading volume is known as the 'short ratio". I have chosen to use 3 days of short interest as my cut-off for significance. I suspect that interest much more than three days may have the potential for a short squeeze which could propel a stock even higher. In the case of Matrix, the short ratio is 4.9 days of volume. A plus in my humble opinion.
Finally, the company doesn't pay any dividends and the last stock split was a 2:1 split in November, 2003.
What about the stock chart?
I am certainly an amateur (if not less) at looking at stock charts. The analysis of stock charting patterns is known as Technical Analysis. Over the last several years, after being presented with "Point & Figure" charts at my stock club by a local broker, I have learned to appreciate these columns of x's and o's.
But on a much more simple level, I am looking for a stock chart which shows that the price has been steadily increasing or at least appears to be doing so in the intermediate past to the present.
Looking at the 'Point & Figure' chart on MTRX from StockCharts.com, we can see that the stock took a steep drop from $20/share in January, 2004, to a low of $3.25 in April, 2005. Since that date, the stock price has steadily increased to as high as $30 in November, 2007, before dipping to $21 and now once again moving higher to the $24.40 level. The chart looks encouraging to me for at least the last year-and-a-half. Recall the dip in revenue and earnings results that ocurred in 2005 and you will understand my strong belief in the close association between financial results and technical performance.
Summary: What do I think?
Needless to say I like this stock (or of course I wouldn't be posting it!). Briefly, they moved strongly higher today, reported very strong results last quarter which beat expectations, have a record of reporting strong results (except for a dip in 2005) with reasonable expansion of outstanding shares, positive free cash flow and a solid balance sheet.
Valuation-wise, the p/e is moderate with a presumed PEG of under 1.0 (my own estimate), a Price/Sales ratio low for its group, but a Return on Equity also a bit under average. There are plenty of shares out short, and the chart looks strong.
Unfortunately, I don't have a signal to be buying anything. (And I already own one stock, SNCR, for a 'trade'). But if I were buying a stock today, this is definitely the kind of stock I would be purchasing.
Thanks again for visiting my blog. I hope my explanations today weren't too lengthy. I want to always make my entries accessable to the most amateur investors like myself who are continuing to try to grasp the nuances of investing.
If you get a chance, be sure and stop by my Covestor Page where my trading portfolio is reviewed, my SocialPicks page where all of my stock picks from the past year are reviewed, and my Podcast Site where you can download mp3's of me discussing some of the same stocks I write about here on the website. Of course, if you have any comments or questions, please feel free to leave them on the blog or email me at email@example.com.
Have a great weekend and a very Merry Christmas next week!