The Razor's Edge

2-Year Price History

A Word Of Caution

Smith International, Inc. (SII) has experienced a very significant loss in market value recently. Clearly this drop in price will have an impact on the valuation but the recent events that caused the drop may have not been fully factored into our analysis yet. When a stock loses value very quickly it could be a sign that there is a fear of bankruptcy.

Of course, you may proceed to review our research report for this security, but please be aware that our model may not reflect significant factors surrounding this company.

Therefore, (and as always), check additional sources and available information regarding SII before making an investment decision.

Ockham's Rating

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SII Revenue

As we have often noted, in our valuation methodology, "Cash is King." Well, it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic we look very closely at revenue numbers as our second most important factor in valuing a company's stock. We have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, SII the high and low end of the Price to Sales per share ratios are 1.45x and 0.83x respectively.

Notice that SII's current Price to Sales per share ratio is 0.44x, which is quite a bit below what we consider a normal Price to Sales ratio for this stock. Given normal conditions and a price of $25.03, SII is 62% below where we would expect to see it. This will beneficially factor into our final analysis of SII as it is not often that this stock sinks to these levels.

SII Cash Earnings

As a value investment framework, Ockham Research is similar to a private equity firm in terms of our valuation methods. We are always on the lookout for value in the form of sales and cash numbers. In the case of SII, Ockham views their current Cash Earnings as significantly below their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for SII, the current level of Cash Earnings compared to its historical levels helps identify where SII is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 18.33 and a historical low Cash Earnings per share ratio of 10.57, an investor can relate where value becomes optimal.

So what does "significantly below" mean when we talk about Price to Cash Earnings numbers for SII? From the Ockham perspective, we are looking specifically at SII to see if the market is recognizing the huge disparity between SII's past stock price to Cash Earnings ratio to today's levels. At a difference of 69% below the average historical Price to Cash Earnings ratio, our view would be quite positive at this point. However, as with all metrics, we need to also take other factors into account when looking at SII. While we view better Cash Earnings metrics as very important, if the market is slow to identify this value, or if Cash Earnings were to fall from these levels, we would become more neutral in our stance.

SII Dividends

While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company.

In SII’s case, the estimated annual dividend is $0.48 resulting in a current dividend yield of 1.92%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from SII against the historic high and low levels over the past 10 years. The highest dividend yield from SII over this period was 2.63% while the lowest dividend yield was 0.00% SII’s current dividend yield is therefore significantly higher than its median dividend yield historically. In fact, the current yield is 46.01% above the median which weighs very positively on our analysis of SII.