The Gig is up – This Stock’s A Winner
Today we’re taking a look at an under the radar small-cap stock that has the potential to reward investors with big profits in 2010. I recommended Lancaster Colony (Nasdaq: LANC) in Small Cap Investor Daily on December 4th and since then the stock is up 9%, with more gains on the way. This will be a fun stock to review since the company just reported strong second quarter fiscal 2010 results yesterday (note that the quarter ended December 31, 2009).
Lancaster Colony won’t knock your socks off, so feel free to sit back and relax while you read this. But the stock should be trading at least 10% higher, and could even rise as much as 28% in the next six months. That should be exciting to investors.
Lancaster is a $1.5 billion consumer goods company with a long history dating back to 1961. It operates in two autonomous business segments: Specialty Foods, and Glassware and Candles. Now, neither of those seem particularly exciting to me but I still like the company’s stock.
You’ll likely recognize Lancaster’s specialty food products while perusing the isle at your local grocer. They include Marzetti and Girard dressings and sauces, Mamma Bella frozen breads, and Chatham Village croutons. If you’re a candle aficionado you may recognize the Candle-lite brand that the Glassware and Candles division produces. Or if you’re a purchasing agent in the food service or hospitality industry, you’re familiar with the company’s commercial brand, Wescon.
Of course, Lancaster produces a number of other products for commercial purposes besides candles including mugs, stemware, floor mats, tableware, and bakeware. Again, it’s not exactly glitzy stuff. But higher demand for value-priced products in the Glassware and Candles division drove segment sales 42% higher in the latest quarter. That’s pretty nice - even though CEO John Gerlach did qualify the performance by saying some customers shifted seasonal purchases from the first to the second quarter.
Total revenues in the second quarter of 2010 were $304 million, an increase of 5.6% from the second quarter of 2009. But net income in the quarter jumped by a whopping 39% compared to a year earlier, rising to $39.5 million and resulting in $1.40 in earnings per share. That’s a big upside move from $1.02 per share in the comparable quarter of 2009. In fact it is a 37% jump that blew analyst expectations of $1.02 out of the water by 37%.
Even more impressive, Lancaster Colony’s net income margin increased from 10% to 13%. But check this out. In the second quarter of fiscal 2009 the company received $8.7 million (pre-tax), or $0.20 per share, as a distribution under U.S. anti-dumping laws. This past quarter, that distribution was only $0.9 million, or $0.02 per share. If we back those distributions out, the company’s net margin actually increased from 7% to 12.7%, before accounting for tax on the distribution.
That performance is the result of excellent cost management during a difficult economic period and strong performance in the Glassware and Candles segment. That segment had posted a $1 million operating loss in the second quarter of 2009.
The bottom line is that this company is performing pretty well lately. Oh, and another thing. Lancaster Colony is one of only 17 U.S. companies that have been able to increase a dividend payment each year over the last 47 years. Small-cap value investors should perk up on that news. In 2010 the company will be paying out $1.18 per share, up slightly from the $1.14 paid out in 2009. That dividend is yielding 2.2% for investors who buy shares now.
This is definitely a bit of a dull company in my opinion, but the profit opportunity is anything but. However, the CEO isn’t scoring any points with his conservative comments. Regarding the second half of fiscal 2010, Mr. Gerlach stated, “we believe second half year-over-year comparative results will be less robust than the first-half comparisons as we face further pressure on foodservice sales, substantially less benefit from lower ingredient costs, and the seasonal dip in food and candle retail sales dynamics”.
My response: “Is that right Mr. Gerlach: Looks to me like you’re following a classic strategy of under-promise and over-deliver!”
Over the last five quarters, Mr. Gerlach’s company has beaten consensus analyst earnings estimates by 71%, 55%, 31%, 22%, and finally by 37% in the most recent quarter. That’s an average of 43%. Given that the company has already earned $2.41 per share through the first six months of fiscal 2010, and analysts are expecting only $3.77 per share on the year, I think Lancaster is going to continue to beat expectations this coming year.
So let’s put a price target on shares. We’ll begin with $3.77 in 2010 earnings per share as our earnings ‘floor’ since that’s what analysts had expected prior to yesterday’s quarterly results. Using a totally reasonable PE multiple of 14 on current year earnings yields a low stock price of $52.78. That’s our floor, and in fact it’s pretty close to the current market price of $53.60.
But Lancaster only needs to earn $1.36 per share in the second half of the year to meet that expectation. And analysts are already expecting $1.74. So if we add $1.74 to $2.41 we’ll have what is actually a conservative estimate of $4.15 on the year. Applying a 14 PE multiple gives a stock price of $58.10. That’s 9% higher than today. But I still think that’s way too conservative.
Let’s assume Lancaster beats by 43% on the next two quarters like it has over the last five. It would then earn $2.48 per share in the second half, bringing full year earnings up to $4.89. And using the 14 PE multiple gives a price target of $68.46. That’s a best case scenario that puts shares 28% higher than the current market price.
The bottom line is this: you’re not going to impress your friends by telling them that you own shares in a company that sells salad dressing, candles, and stemware. So keep it to yourself. But take pride in the fact that you invest in under the radar small-cap stocks that have both upside share price potential, and a secure 2% dividend yield.
If you want a little more help finding profitable small-cap stocks, I encourage you to begin a trial subscription to Small Cap Investor PRO. In my portfolio I hold a number of both conservative, and highly aggressive small-cap stocks that could earn you big profits in 2010.
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Did you purchase shares of Lancaster Colony when I recommended it on December 4th? If so, let me know. My address is: editorial@smallcapinvestor.com.
