Small-cap hunters like myself, and my co-subscribers to the Motley Fool's Hidden Gems small-cap newsletter, just love to find companies priced under $2 billion that turn in consistently great profits quarter after quarter. An interesting confluence of circumstances turned me on to one such possibility last night -- and it's a company that I have actually been following for a few months now: Macrovision (NASDAQ:MVSN).
Thanks to the magic of Amazon.com (NASDAQ:AMZN), I was watching the recently released DVD of Viacom's (NYSE:VIA) CBS division's erstwhile hit show, Northern Exposure. And what should I see patrolling the streets of Cicely -- before even the moose walked by -- but Macrovision's logo, following a strong suggestion that I refrain from any piratic disc-copying urges I might be entertaining.
A few hours earlier, Macrovision had released its second-quarter earnings numbers, and they were strong, too. Net income per share doubled over the year-ago quarter to $0.18; revenues were up 22%. Incidentally, both numbers topped Wall Street's estimates, leading to a surge in demand for Macrovision's shares on the after-hours market that has continued into today.
Now, Hidden Gems seekers enjoy generally accepted accounting principles profits as much as anyone (even as we mock Macrovision's recitation of "what-if" pro forma numbers). What we really like to see, however, is free cash flow -- preferably combined with a low enterprise value and a fast earnings growth rate. Macrovision has all of the above. At an enterprise value of $915 million, and with trailing free cash flow of almost $50 million, the company's EV/FCF is a respectable 18.3. Pair that with the company's projected growth rate of 20% over the next five years, and you have a company with serious gem potential.
Ordinarily, I view projected growth rates with a bit of skepticism -- predicting the future is a tough trick to pull off consistently. But when you look at Macrovision's past performance, laid out for your reading pleasure on Yahoo! (NASDAQ:YHOO) Finance's analyst estimates page, you will see that Macrovision has achieved the same 20% annual growth over the previous five years as well. That lends a bit more credence to the projected earnings numbers.
Putting it all together, at an EV/FCF/G ratio of about 0.9, Macrovision looks only slightly undervalued today. But if you keep an eye on this one, I suspect a buying opportunity will present itself eventually. It has happened before on some of Mr. Market's moodier days. It will happen again.
Looking for other undervalued, fast-growing small caps with strong profit potential? Every month, Fool co-founder Tom Gardner provides two strong candidates to give you a head start on your research. And for those who need a hand with valuation, Tom also provides recommended "buy prices" -- so you know when Mr. Market is offering you a bargain and can strike while the iron is hot. Give Hidden Gems a free trial today.
Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.
