The Razor's Edge

2-Year Price History

A Word Of Caution

While, we stand by our ratings methodology for long term value investors, sometimes smaller companies will be more volatile in terms of revenue, cash earnings, and other fundamental factors. Virco Manufacturing Corporation (VIRC) is such a stock. Because many micro-caps are lightly traded their stock price can fluctuate because of a single large trade. Also, there is less analyst coverage of such micro-caps and therefore less information from which to base our ratings.

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

Ockham's Rating

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VIRC 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, VIRC the high and low end of the Price to Sales per share ratios are 0.60x and 0.30x respectively.

Notice that VIRC's current Price to Sales per share ratio is 0.12x, 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 $1.98, VIRC is 73% below where we would expect to see it. This will beneficially factor into our final analysis of VIRC as it is not often that this stock sinks to these levels.

VIRC 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 VIRC, 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 VIRC, the current level of Cash Earnings compared to its historical levels helps identify where VIRC 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 14.08 and a historical low Cash Earnings per share ratio of 5.02, an investor can relate where value becomes optimal.

So what does "significantly below" mean when we talk about Price to Cash Earnings numbers for VIRC? From the Ockham perspective, we are looking specifically at VIRC to see if the market is recognizing the huge disparity between VIRC's past stock price to Cash Earnings ratio to today's levels. At a difference of 37% 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 VIRC. 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.

VIRC 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 VIRC’s case, the estimated annual dividend is $0.10 resulting in a current dividend yield of 5.05%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from VIRC against the historic high and low levels over the past 10 years. The highest dividend yield from VIRC over this period was 6.02% while the lowest dividend yield was 0.00% VIRC’s current dividend yield is therefore significantly higher than its median dividend yield historically. In fact, the current yield is 67.77% above the median which weighs very positively on our analysis of VIRC.