It has been about 52 months since I purchased Value Line Inc. (NASDAQ: VALUE). Four months later, I took a profit of 32% after spotting some risks, and wrote an article to that effect with the very unoriginal title “Value Line: Growing Risks“I bought back once again in mid-May last year when the shares were trading at a PE of around 13, although I have not published that fact on this forum. shares have gone parabolic so it’s time to revisit the name one more time I want to determine whether or not it makes sense to buy more, hold or sell the position I will make this decision by reviewing the latest financial results and reviewing the valuation.
Welcome to the “thesis statement” part of the article. This is where I regale you with the gist of my thoughts on a given company in case you can’t deduce my thoughts from the title and bullet points above. I offer these “thesis statement” paragraphs in each of my articles because I understand that not everyone wants to expose themselves to the full “Doyle experience”. The thesis statement lets you get in the article, get the highlights, and get out before you suffer the effects of my bad jokes or naked bragging. I think the weight of averages is that Value Line’s revenue and net income will start to slow over the next year, and I would only be willing to buy more if the stock is trading at a reasonably cheap valuation. The problem is that not only are stocks not cheap, but they trade at consistently high valuations. This is a dangerous combination in my opinion, and for this reason I will sell. If you own stocks, I recommend you do the same. If you are considering buying, I recommend waiting until the price drops to match the value. Given that the dividend yield is currently less than a third of the 10-year treasury, I think there are far better alternatives right now.
I would characterize the financial results of the past few years in some respects as “Eddy stable”. For example, FY2022 revenue is approximately 0.5% higher than FY2020 revenue. At the same time, however, net income increased by approximately 59%, primarily due to a $2.3 million gain on the “SBA loan waiver” and an 83% increase in profit sharing from EAM Trust, the company’s asset management arm.
Writing to EAM, I believe this is the engine of growth here. For example, in 2014, approximately 20.6% of revenue came from EAM, and by FY2022, that figure had risen to 39%. Given this, and given that total net assets under management by EAM fell 32.4% from FY2021 to FY22 (from $4.964 billion in 2021 to $3.357 billion in 2022), I find disturbing.
On the bright side, the capital structure and the dividend are pretty safe in my opinion. In particular, cash represents approximately 60.5% of total liabilities. Additionally, FY2022 dividends were only about 34% of operating cash and 35% of net income. So I expect revenues and net income, especially from the EAM business, to likely fall from current levels. That said, I’d be comfortable adding to my position here assuming the price is right.
Since the last time I checked, it looks like I just experienced another surge in subscribers, which is both flattering and confusing. Anyway, welcome. You knew people weren’t exposed to my thoughts on the difference between a business and a stock, so welcome to the party. I am of the opinion that business and stock are very different things, and as such we need to consider each of them separately when making a decision to buy or sell. My opinion is that a reasonably strong business can be a terrible investment at the wrong price, while a struggling business can be a decent investment if you pick it up at a sufficient discount to its intrinsic value.
Another way to conceive of this idea is that the firm is an organization that buys a number of inputs, such as the time of stock analysts, performs activities that add value to them, and sells the results for a profit. The stock, on the other hand, is a traded instrument that reflects the crowd’s overall expectations about the long-term prospects for a given company. If you’ve ever invested in stocks, you may have noticed that the crowd can be fickle and tend to drive prices up and down relatively frequently when they change their minds about the distant future of a given company. . Additionally, a company’s stock can be rocked by our collective view of “stock” as an asset class, and Value Line can be particularly affected by this, as it can be viewed as an indicator of the overall market. This disconnect between “the business” and “the action” can be frustrating in some ways, but it also represents an opportunity for us. In my experience, the only way to trade stocks profitably is to spot a disconnect between current market expectations of a given company’s future performance and subsequent results. It is generally the case that the lower the price paid for a given stock, the higher the future returns for the investor. In order to buy at these cheap prices, you need to buy when the crowd is feeling particularly down on a given name. In my world, “down in the dumps” means “cheap”. You may recall from the discussion of the business that I expect revenue and profit from the EAM business to decline.
Those who regularly read my articles know that I measure the marketability of a stock in several ways, ranging from the simplest to the most complicated. On the simple side, I track price multiples at some measure of economic value, such as earnings, free cash flow, book value, etc. Ideally, I want a company to trade at a discount to the overall market and its own history. To put the current valuation into context, I was excited about an investment in Value Line when the stock was trading around 12.5 in April 2018. I sold when the stock reached a PE of around 16.5 four months later. I bought back in mid-May last year when the PE was hovering around 13. It’s a very, very different world from what follows.
To underscore the fact that today’s valuations are unprecedented, feast your eyes on this chart dating back to the mid-1980s. These stocks have never been so expensive.
While investors pay more for $1 of income than they ever had, they receive low dividend yields over several years as follows:
In my opinion, paying more and getting less is not a winning formula in investing. While I believe EAM’s revenue and earnings will moderate from here, the market seems more optimistic than ever about the future of this business. Given the above, I will sell my shares and recommend investors do the same if they are currently long or avoid the shares if they are considering buying.
I think it’s a great deal in many ways and, as I wrote above, I think the dividend is very well covered. The problem is valuation. This well-covered dividend gives investors about a third of the income they can receive from a 10-year Treasury note. In the relativistic game of investing, this is a problem. This is particularly troubling given the fact that I expect growth to slow here. Just as I believe “stock” and “company” are separate things, I believe “price” and “value” are also separate and can remain detached from each other for a time. While I am open to the possibility that the market will push these stocks higher from current levels, any gains from here will inevitably be foregone in my view.