It's easy to look at a company's top-line sales numbers to see whether business activity is rising or falling, but a comparison with inventory can provide a much closer look at a company's sales trends.
Inventory can represent two things: the company's expectation of what they will soon sell, and also what the company has not yet sold. Therefore, a growing inventory by itself can mean a more positive sales outlook, or the inability to sell products.
However, compared with revenue, inventory tells a different story. If inventory grows faster than revenue, it probably indicates that the company is having trouble selling its inventory.
Of course, other explanations can exist, such as changes in company policy.
To demonstrate this, we ran a screen on over 4,000 U.S.-traded stocks for those exhibiting positive trends in inventory vs. revenue, with growth in quarterly revenue out-pacing growth in inventory as well as inventory becoming a smaller portion of current assets.
We also wanted to screen for companies that appear undervalued. One way to search for potentially undervalued stocks is by comparing current price to analyst target prices, with stocks trading at significant discounts to target appearing undervalued.
Of course, analyst prices tend to be inflated most of the time, so we ran a screen that used the most pessimistic analyst target price as the benchmark for our analysis.
In addition, we only focused on companies that have more than five analyst target prices (to make sure we only focus on companies that have decent analyst coverage).
The screen produced 10 stocks, listed below. Do you think these potentially undervalued companies have strong operations?
List sorted alphabetically. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. Ceragon Networks (Nasdaq: CRNT): Offers wireless backhaul solutions that enable cellular operators and other wireless service providers to deliver voice and data services, such as Internet browsing, music, and video applications. Of the 12 analysts that cover the stock, the lowest price target estimate stands at $13.0, which implies an upside of 29.22% from current levels around $10.06. MRQ revenue grew by 81.23% over the last year ($110.35M vs. $60.89M y/y). MRQ inventory grew by 50.19% during the same time period ($103M vs. $68.58M y/y). MRQ inventory, as a percentage of current assets, decreased from 33.23% to 32.34% over the last year (comparing three months ending 2011-06-30 to three months ending 2010-06-30).
2. Exactech (Nasdaq: EXAC): Develops, manufactures, markets, distributes, and sells orthopedic implant devices and related surgical instrumentation, as well as offers biologic services to hospitals and physicians in the United States and internationally. Of the 5 analysts that cover the stock, the lowest price target estimate stands at $19.0, which implies an upside of 28.73% from current levels around $14.76. MRQ revenue grew by 8.64% over the last year ($51.68M vs. $47.57M y/y). MRQ inventory grew by 1.19% during the same time period ($64.03M vs. $63.28M y/y). MRQ inventory, as a percentage of current assets, decreased from 57.96% to 52.66% over the last year (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).
3. GenOn Energy (NYSE: GEN): Operates as a generator of wholesale electricity in the United States. Of the 11 analysts that cover the stock, the lowest price target estimate stands at $3.40, which implies an upside of 23.19% from current levels around $2.76. MRQ revenue grew by 232.79% over the last year ($812M vs. $244M y/y). MRQ inventory grew by 88.59% during the same time period ($525M vs. $278.38M y/y). MRQ inventory, as a percentage of current assets, decreased from 19.5% to 13.28% over the last year (comparing three months ending 2011-06-30 to three months ending 2010-06-30).
4. Mosaic (NYSE: MOS): Engages in the production and marketing of concentrated phosphate- and potash-based crop nutrients for the agriculture industry worldwide. Of the 12 analysts that cover the stock, the lowest price target estimate stands at $72.0, which implies an upside of 31.27% from current levels around $54.85. MRQ revenue grew by 40.9% over the last year ($3,083.3M vs. $2,188.3M y/y). MRQ inventory grew by 34.12% during the same time period ($1,402M vs. $1,045.3M y/y). MRQ inventory, as a percentage of current assets, decreased from 21.98% to 20.75% over the last year (comparing three months ending 2011-08-31 to three months ending 2010-08-31).
5. Microsemi (Nasdaq: MSCC): Engages in the design, manufacture, and marketing of analog and mixed-signal integrated circuits (IC) and semiconductors primarily in the United States, as well as in Europe and Asia. Of the 9 analysts that cover the stock, the lowest price target estimate stands at $22.0, which implies an upside of 23.53% from current levels around $17.81. MRQ revenue grew by 59.33% over the last year ($216.72M vs. $136.02M y/y). MRQ inventory grew by 22.88% during the same time period ($145.35M vs. $118.29M y/y). MRQ inventory, as a percentage of current assets, decreased from 29.11% to 27.13% over the last year (comparing 13 weeks ending 2011-07-03 to 13 weeks ending 2010-06-27).
6. PowerSecure International (Nasdaq: POWR): Provides energy technology products, services, and data management systems to industrial and commercial users, and suppliers of natural gas and electricity. Of the 6 analysts that cover the stock, the lowest price target estimate stands at $5.50, which implies an upside of 26.15% from current levels around $4.36. MRQ revenue grew by 1.65% over the last year ($30.22M vs. $29.73M y/y). MRQ inventory grew by -4.76% during the same time period ($26.03M vs. $27.33M y/y). MRQ inventory, as a percentage of current assets, decreased from 37.64% to 24.44% over the last year (comparing three months ending 2011-06-30 to three months ending 2010-06-30).
7. Schnitzer Steel Industries (Nasdaq: SCHN): Engages in recycling ferrous and nonferrous scrap metals, and used and salvaged vehicles; and manufacturing finished steel products. Of the 8 analysts that cover the stock, the lowest price target estimate stands at $50.0, which implies an upside of 24.47% from current levels around $40.17. MRQ revenue grew by 39.45% over the last year ($981.06M vs. $703.54M y/y). MRQ inventory grew by 25.02% during the same time period ($364.16M vs. $291.27M y/y). MRQ inventory, as a percentage of current assets, decreased from 59.67% to 54.46% over the last year (comparing three months ending 2011-05-31 to three months ending 2010-05-31).
8. The Spectranetics (Nasdaq: SPNC): Designs, manufactures, and markets single use medical devices used in minimally invasive surgical procedures within the cardiovascular system in conjunction with its proprietary excimer laser system, the CVX-300. Of the 6 analysts that cover the stock, the lowest price target estimate stands at $9.0, which implies an upside of 25.17% from current levels around $7.19. MRQ revenue grew by 7.3% over the last year ($32.21M vs. $30.02M y/y). MRQ inventory grew by -23.46% during the same time period ($6.98M vs. $9.12M y/y). MRQ inventory, as a percentage of current assets, decreased from 17.68% to 11.11% over the last year (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).
9. Vale (Nasdaq: VALE): Engages in the exploration, production, and sale of basic metals in Brazil. Of the 21 analysts that cover the stock, the lowest price target estimate stands at $30.40, which implies an upside of 22.93% from current levels around $24.73. MRQ revenue grew by 55.2% over the last year ($14,989M vs. $9,658M y/y). MRQ inventory grew by 38.54% during the same time period ($5,273M vs. $3,806M y/y). MRQ inventory, as a percentage of current assets, decreased from 20.12% to 16.65% over the last year (comparing three months ending 2011-06-30 to three months ending 2010-06-30).
10. ZOLL Medical (Nasdaq: ZOLL): Develops, manufactures, and markets resuscitation devices and related software solutions worldwide. Of the seven analysts that cover the stock, the lowest price target estimate stands at $50.00, which implies an upside of 33.51% from current levels around $37.45. MRQ revenue grew by 22.29% over the last year ($136.15M vs. $111.33M y/y). MRQ inventory grew by -12% during the same time period ($65.79M vs. $74.76M y/y). MRQ inventory, as a percentage of current assets, decreased from 31.16% to 25.65% over the last year (comparing 13 weeks ending 2011-07-03 to 13 weeks ending 2010-07-04).
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Disclosure: Kapitall's Eben Esterhuizen and Alexander Crawford do not own any of the shares mentioned above. Accounting data sourced from Google Finance, target price data sourced from Thomson/First Call (via Yahoo! Finance).
