The Idea List: Issue #2
Analyzing Monro, Premier, and EMCORE
In this post I want to share three stock ideas that appear to be undervalued. These companies came from the “top of the funnel” of my research process, meaning they came from stock screeners, or recommendations from Twitter and Substack. What I want to do here is present some qualitative and quantitative metrics that determine if I should keep researching the stock or take a pass on it. Further, I want to do a basic valuation to verify that the company is actually undervalued. The end goal is to have some semi-vetted stock ideas that I can add to a watchlist and start doing more thorough research on.
Monro (MNRO)
The first stock I will analyze is Monro, which showed up in my low free cash flow screener with a P/FCF of 5.9x. The company has a market capitalization around $934M, with a stock price at $30.50. Monro is a car service company with over 1,200 locations, focus on tires and other light maintenance items like brakes. They are second largest repair company, and are a a serial acquirer. Back in February 2023 MNRO was trading around $55, so it has slide quite a bit in price. Some key stats are a price to book value of 1.25, P/FCF 5.9, 5 year median ROA at 3%, and debt to equity of 0.14. Monro’s revenue has grown quite a bit in the last 10 years except for 2020, and the past year. The company’s operating profit peaked in 2019. Since this company is usually profitable, but has low return on assets, then I will use an earnings power valuation.
For my quick valuation, I’m an estimated revenue of $1.3B, 9.8% operating margin based on their 10 year average, 25% tax rate, and a 10% discount rate. Applying these figures gives an enterprise value, so I add back cash and net out Monro’s debt to get their estimated equity value. This comes out to be $885M, or $27.50 a share. Based on this, Monro does not seem undervalued even though it has a low free cash flow multiple. There must be some nuance in the company’s financials that cause a gap between income and cash flows. Finally, I am not sure why this company was trading over $50 a share. Maybe Monro had a growth story because it was buying all these smaller competitors, but now the story is broken with the recent decline in revenues.
Premier (PINC)
Next is Premier, which is a healthcare improvement company. This involves helping hospitals with supply chains, data analytics, IT, among other things. Premier has a market cap of $2.6B and a $23 share price. The stock price peaked around $41 in late 2021, trended down since. Key stats include a P/FCF 7.0, P/B 1.1, 5 year median ROA 7.7%, and a debt-to-equity ratio of 0.03. PINC’s revenue has generally increased over the past 10 years, spiking to $1.7B in 2021, then has come back down to $1.3B. Ten year average operating margins come in at 26%, but they have fallen to 18% the past couple of years.
Since Premier has a return on assets around its cost of capital, it seems to be a decent business, but probably does not have a competitive advantage. Based on this I’ll use the earnings power valuation method. For my back of the envelope valuation, I’m using a $1.3B revenue, 26% operating margin, 25% tax rate, 10% discount rate. Factoring Premier’s cash on the balance sheet and debt gives us an estimated equity value of $2.8B, and a stock fair value of $23.40. Turns out Premier is trading around its fair value. While I would be interested PINC trading below its fair value, the business does not seem that interesting to me so I probably will stop my analysis here.
EMCORE (EMKR)
Lastly, EMCORE caught my eye when I was looking for low price to book stocks since I have previously owned this company (and sold it for a small loss). The stock has fallen even more since I owned it and has a P/B of 0.57. EMKR is a small stock, with a market cap at $51M and a price of $0.67. The company made RF circuits for cable TV boxes, and transitioned to the higher growth business of making inertial navigation units for the defense industry. The RF components revenue started to quickly decline a couple of years ago, impacting the company’s profits. EMCORE is in the middle of shutting down the RF component unit, selling off fab equipment, and restructuring. Looking at EMCORE’s income statement shows that 7 out of the last 10 years have produced an operating loss. The company’s share count was stable, then started to rise after 2020, sharply rose in 2023. Shares outstanding were was 29M in 2020, now have risen to 69.2M, which is a red flag.
Since EMCORE is often unprofitable, the best way to value it as based on its assets. Based on the quarter ended September 2023, EMKR’s balance sheet shows a NCAV $48.30M, or $0.697 a share. When I originally owned this stock, it looked cheap on an asset valuation. Then the large losses started to mount due to the RF segment, so I sold out. Looking at this company with a fresh perspective, I think I would only be interested if it was trading at a deep discount to NCAV and I had some confidence that the losses share issuance have settled down.