The Idea List: Issue #6

This week I analyze Motorcar Parts of America, Carriage Services, and Jewett-Cameron Trading Company

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.

Motorcar Parts of America (MPAA)

While researching low price-to-book stocks, I came across Motorcar Parts of America (MPAA), which is currently trading at around two-thirds of its book value. This company manufactures various car parts and has experienced a decline in its stock price, dropping from $23 in 2021 to its current value of $8. It seems that the company's stock has suffered due to heightened financing costs, including the issuance of preferred stock with a 10% yield, as well as an extraordinary high tax bill incurred over the past year. MPAA operates with narrow profit margins and frequently faces minor losses, resulting in a subpar return on assets. Given its inadequate return on assets compared to its cost of capital, I will value the company based on its asset value rather than its earning power.

MPAA has $996 million in assets, with a significant portion allocated to inventory and assets tied to core deposits, where customers return broken parts for remanufacturing. The company primarily leases its facilities, possessing machinery but limited property assets. Total liabilities amount to $714 million, predominantly attributed to $206M core deposits liabilities, $115 million in short-term debt, and $73 million in operating lease liabilities, but no long-term debt. Looking through their balance sheet, I see no assets requiring adjustment to achieve fair value. Therefor, I find the stated equity value of $281 million to be a reasonable approximation of replacement value, resulting in a book value of $14.35. While MPAA appears undervalued, I believe investors may need to anticipate a reduction in interest expenses or an improvement in margins for the company to trade closer to its book value.

Carriage Services (CSV)

Carriage Services is a company specializing in the acquisition of cemeteries and funeral homes. Following the COVID-19 pandemic, its stock experienced a significant rally, reaching a peak of $64, but has since stabilized around $27. My guess is that the initial rally was propelled by increased sales due to the pandemic, while the subsequent decline may be due to COVID settling dow. However, Carriage Services' revenue has not declined to pre-pandemic levels. The company is similar to a real estate company, where they acquire funeral homes and cemeteries with steady cash flows and carry a decent amount of debt. Additionally, its services include pre-payment options, creating a type of float similar to insurance companies. Over recent years, Carriage Services has generated approximately $80 million in operating profit, although interest expenses have risen, totaling $36 million last year. Factoring in a 25% tax rate yields an estimated net income of $33 million. Applying an 8% discount rate results in an estimated equity value of $412 million. Provided Carriage Services' revenue does not experience a drastic decline, the stock appears to be trading near fair value. In the end, the business is interesting and it seems to be a quality microcap stock, so I would be interested in buying some shares at a discount

Jewett-Cameron Trading Company (JCTCF)

Jewett-Cameron is another company that experienced a surge in its stock price during the pandemic, reaching a peak of around $12 before declining to its current price of $5.40. The company is absolutely tiny, with a market capitalization of $19 million. Jewett-Cameron manufacturers building materials and has expanded its offerings to include dog kennels and other pet accessories. What caught my attention about JCTCF is that it is trading near its net current asset value (NCAV). When looking at net-nets, I like to make sure they do not lose a massive amount of money. Fortunately, Jewett-Cameron has remained profitable for the past decade, with only a minor loss reported last year. Moreover, the company's practice of buying back its own stock is a positive indicator, versus the red flag of net-nets issuing a lot of stock. With current assets totaling $25 million and total liabilities at $4.5 million, the NCAV stands at $20.5 million, translating to $5.85 per share. Given that JCTCF is trading slightly below its NCAV, so I’ll add it to the list of other net-nets that I would buy if I can get more margin of safety