Value Line - An Iconic, Debt-Free, Name Near a Decade Low

Value Line [NDQ:VALU - $22.89] provides investment advisory services to mutual funds, institutions and individual clients, and publishes investment-related periodicals. The Value Line Publishing subsidiary publishes investment advisories that rate and evaluate common stocks, options, mutual funds, and convertibles. Value Line also produces investment-related software and manages a family of mutual funds, pension funds, institutional and individual portfolios through Value Line Asset Management.

The company’s investment advice can be found in almost any good-sized library in America as well as on the shelves of almost every American brokerage firm. The company recently paid a $47,706,000 fine to settle with the SEC regarding a variety of mutual fund practices that were not related to their core business of providing investment related information. Jean Bernhard Buttner resigned as CEO and Chairman over this issue last November and was replaced by Howard Brecher, Value Line’s Chief Legal Officer, who became the Acting Chairman.

The fiscal third quarter showed decent results with earnings (excluding the SEC settlement) of $0.36 per share versus a $0.27 estimate and year earlier EPS of $0.38. The lone analyst covering Value Line stock now carries FY 2010 (ends April 30, 2010) and FY 2011 estimates of $1.45 and $1.52 excluding the one-time charge.

Even after paying the large SEC fine Value Line remains debt-free and holds about $14 million in treasury cash. The dividend had been $0.40 quarterly through January 2009 but was cut to $0.30 in April last year and to $0.20 quarterly last July when the need to conserve cash for the settlement became defined. I think the attractive current yield of 3.5% is now sustainable.

Here are the per share, fully diluted, numbers from continuing operations for the FYs 2005 – 2009 as reported by Morningstar:

Clearly, Value Line has ‘earnings power’ of at least $2 per share in normal times. Excepting the November 2008 – March 9, 2009 meltdown period Value Line has almost never traded below about 15x earnings. Now that the SEC matter is behind the company and with new upper management in place I think Value Line can get back to much better earnings and a $30 – $40 share price again. Is that a reasonable target? Value Line shares hit peak prices of between $39.98 and $57.70 during each of the past five years. They touched $36.52 as recently as last summer.

With a clean balance sheet, a higher-than-CD-rate yield and a well entrenched market position, there appears to be little risk of a serious decline from today’s closing price of $22.89. VALU touched a new 52-week low during today’s trading, getting me interested in taking a position.

Of the 10 million outstanding shares about 87% are held by insiders with 9% of the rest held by mutual funds.

Some well-regarded holders (as of Dec. 31, 2009) included:

……………………………………………………… # shares ………… % Out.

Dimensional Fund Advisors …………… 201,841 …………. 2.02%           

Wellington Management ………..……. 184,884 …….…… 1.85%

American Century Companies ………. 125,700 …………. 1.26%           

Northern Trust Corp. …………………….. 50,558 …………… 0.51%           

Oppenheimer Funds ……………………… 47,279 …………… 0.47%                       

Royce and Associates ……………………. 35,487 …………… 0.36%

BlackRock Institutional Trust Co .…… 33,001 …………… 0.33%

BlackRock Fund Advisors ………..…….. 28,824 ………….. 0.29%

State Street Corp. ……………………..….. 23,787 ………….. 0.24%

These shares are very thinly traded. If you plan to buy, use limit orders and be patient. Average trading volume is low and the bid/ask spreads vary from not too large to fairly wide depending on the market mood. 

While nobody can predict a sale of the whole company the heavy and highly concentrated insider holdings could facilitate a deal if the founding family ever decides to unload the business. There are a few well-matched potential acquirers if the Bernhard family wants to exit the business.

Dr. Paul Price

www.BeatingBuffett.com

Disclosure:  Author bought shares of Value Line in today’s trading session.