The Razor’s Edge

2-Year Price History

Ockham’s Rating

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BTU 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 9 years. For, BTU the high and low end of the Price to Sales per share ratios are 1.97x and 0.76x respectively.

Notice that BTU’s current Price to Sales per share ratio is 1.00x, 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 $28.90, BTU is 27% below where we would expect to see it. This will beneficially factor into our final analysis of BTU as it is not often that this stock sinks to these levels.

BTU Cash Earnings

As the old saying goes, "Cash is King!" However, we prefer to capture a few other items within our analysis to identify "cash earnings". Nevertheless, an analysis of Cash Earnings is absolutely pivotal to assessing a company’s value, and currently BTU is significantly below its historical average multiple of Cash Earnings. Looking at the last 9 years we can get a good understanding of what investors have grown to expect from BTU. For example, BTU’s Cash Earnings ratio per share has fluctuated between 5.21 and 13.73 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where BTU is with respect to prior business periods.

So with BTU’s current price (latest close of $28.90) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, BTU is 48% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn’t exist in a vacuum. So if the market doesn’t recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with BTU.

BTU 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 BTU’s case, the estimated annual dividend is $0.24 resulting in a current dividend yield of 0.83%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from BTU against the historic high and low levels over the past 9 years. The highest dividend yield from BTU over this period was 2.43% while the lowest dividend yield was 0.27% It is never a good sign for a company to pay significantly lower dividends, in this case 38.52% below the median yield. Although, dividends are a relatively small portion of our analysis framework, we still see this as a negative factor.