Boyar Research is a well-respected “Value” research firm that’s been selling research reports since the 1970s, they tend to put out a half-dozen reports a year, each one highlighting a handful of undervalued investment ideas, and their most famous publication is their annual “Forgotten Forty” report of attractive and undervalued ideas.

And Boyar is currently selling their most recent research report for $2,500 as they recruit new trial subscribers — they’re mostly used by high net worth and institutional investors, given the price (a subscription inquiry begins with a meeting, not an order form and a credit card), but I’m always interested to see what they talk about when they present at conferences or release some of their reports for free.

So, since the market is finally beginning to appreciate “value” these days, and fearing growth to some degree, I thought we’d put the Thinkolator to work on some of the ideas they’re hinting at in their ads to high-end buyers right now…

This is the intro… as you’d expect, it’s a lot less hype-y than the typical retail-focused newsletter pitch:

“We are pleased to announce that we’ve just released our latest research issue. In it we offer four in-depth reports on companies we believe are undervalued, with catalysts for capital appreciation. A brief description of each company profiled is below:”

So what are the stocks? Let’s see what they say about each, and put the Thinkolator to work…

“A small-cap industrial company with an incredible history and renowned brand that is well positioned for the transition to electric vehicles. Highly profitable and shareholder-friendly, it has reduced its shares outstanding by 48% since 2012 (by a whopping 12.6% in 2021 alone) while paying a healthy dividend (current yield ~2.4%). We project upside of more than 80% as the Company pursues growth initiatives amid the rebound from the pandemic.”

That’s almost certainly Allison Transmission (ALSN), a major truck parts supplier but still a fairly small company, with a market cap of just under $4 billion. The stock has climbed recently, so the current dividend is about 2%, return on equity is extremely high (72%), partly because the debt level is fairly high, and the standard valuation multiples are very low — as is the case for pretty much all auto suppliers (the trailing PE is about 8, forward PE is 7, EV to EBITDA is about 7).

Here’s how the company describes itself:

“Allison Transmission is a global propulsion technology leader that designs, manufactures and distributes vehicle propulsion solutions for commercial and defense vehicles. An established supplier of commercial-duty electrified propulsion systems and the world’s largest global manufacturer of medium- and heavy-duty fully automatic transmissions, Allison offers a broad range of propulsion solutions that are used in a wide variety of applications, including on-highway trucks (distribution, refuse, construction, fire and emergency, etc.), buses (school, transit and coach) including the industry’s first electric hybrid propulsion solution for articulated and non-articulated transit buses launched in 2003, motorhomes, off-highway vehicles and equipment (energy, mining and construction applications) and defense vehicles (tactical wheeled and tracked).”

And yes, it is pretty impressive that they’ve bought back about half of the outstanding shares over the past decade — they’ve still dramatically trailed the market since they went public in March of 2012, and the stock is essentially where it was five years ago, but those buybacks have helped them to have a little bit of earnings-per-share growth. Like many parts makers, Allison used to be owned by a car company — in this case, it was owned by GM, which sold them off to the Carlyle Group and others in a leveraged buyout to raise cash in 2007, and then Carlyle loaded up Allison with debt and took them public again about five years later. They have, to their credit, both reduced the share count and slightly reduced their debt load over the past decade.

Allison is exposed to electric vehicles — like most parts suppliers, they are somewhat embedded with their customers, they participate in the long-term planning by the designers of industrial and commercial vehicles and automobiles, and they have been developing parts electric propulsion systems for years. Analysts expect close to 10% earnings growth from ALSN. They are not exposed to the lighter-duty trucks (like pickup trucks), and they’re also not really exposed to the highway tractor trailers, which surprised me — but they’re really dominant in the midsize commercial vehicles — buses and school buses, delivery trucks, dump trucks, etc. Their latest investor presentation is here if you’d like to get their view of the big picture, and their quarterly update last week was seen by the market as a “beat and raise,” with revenue growth coming in near 25% as the market recovers from last year’s supply chain challenges, which is part of the reason for the recent rise in the share price.

What else? Here’s Boyar’s idea number two…

“A large-cap, diversified manufacturer of natural food ingredients, cosmetic active ingredients, and fragrances whose revenues have more than doubled in recent years after transformational M&A activity, with a major integration now under way that should bring hundreds of millions of dollars in annual cost and revenue synergies. Despite having fallen >35% in value this year amid the broader market rout, the Company caters to mostly defensive end markets and sports a current (and sustainable, in our view) yield of ~3.5%. We see upside potential of ~84% over the next few years as planned debt reduction via asset sales and FCF accrues to investors, with organic growth and meaningful synergies boosting EBITDA.”

That’s almost certainly International Flavors and Fragrances (IFF), and I guess they’re referring to the major merger with DuPont Nutrition & Biosciences that was finalized about 18 months ago — IFF has made plenty of much smaller acquisitions and deals over the years, but that’s the only one where the integration is a big long-term project that might create “hundreds of millions of dollars” in “synergies.”

That merger did dramatically bump up the revenue number, from about $5 billion to $12 billion… but DuPont was actually a little larger than the pre-deal IFF, and it was mostly a share-based merger (not a cash acquisition), so the share count also more than doubled. The deal may well make sense on a cash flow basis, or after all the integration and cost cutting is done, but it hasn’t yet increased the per-share earnings at all — it is certainly a global leader, there are only a few large ingredient and fragrance companies and they all seem to have a pretty firm grip on their customers and market share, so perhaps being patient through the weak period as economic growth slows a bit, inflation bites, and the cost “synergies” have been realized will benefit shareholders.

Patience is hard, and it’s hard to say the stock is genuinely cheap these days, but it’s probably cheap for such a high quality company that mostly operates in a global oligopoly — the forward valuation at IFF is about as attractive as it has looked in many years, at about 17X forward earnings. The dividend at IFF, currently yielding about 3.4%, is as high as it has been other than the last two real market crises (2000-2001 and 2008-2009)… and they’re moving up into the upper echelon of dividend-payers, they’ve raised the dividend every year since 2003 so they make the cut as a “dividend achiever” and are only a few years from making the “dividend aristocrat” list (that requires 25 years of annual dividend increases). Their dividend is not growing fast, sadly, the last few years of increases were in the 2-3% range, so it’s not keeping up with inflation.

IFF reports in about a week, their last investor presentation is available here — it reads like a strategic plan that was then handed to a bunch of MBA students to reword it into business school gobbledygook (us regular folks don’t use words like optimize, align, operationalize and allocate all that often), but they do seem to be on pace for some gradual debt reduction, and for earnings growth in the 4-8% neighborhood (with revenue growth of 9-12%, though both of those numbers are “currency neutral” — which in the current environment means their actual numbers will be worse, thanks to the strong dollar). They’re able to pass through inflation to their customers, so that’s good, but if there are synergies and income growth coming out of this integration and this period of inflation shock, they haven’t shown up in the numbers just yet.

Next?

“A mid-cap manufacturer of leading home-related products whose shares have been pressured by negative perceptions surrounding the rise in mortgage rates. With most of its revenues tied to the repair and remodeling market, however, the Company should benefit as homeowners repair and remodel instead of moving, thereby keeping their lower-rate mortgages. In 2023 the Company will be spinning off its lowest-margin segment to shareholders, leaving a less cyclical Company with better growth prospects and more meaningful M&A opportunities. At current levels, we estimate ~53% upside.”

That’s likely Fortune Brands Home & Security (FBHS), which owns the Moen (plumbing) and Master Lock (security) brands, among others, but is spinning off its large MasterBrand cabinet company next year. I guess it remains to be seen what value people will assign to that cabinetry business — it probably would have been a sexier spinoff last year, when homebuilding was accelerating and everyone was renovating, but renovation is a fairly steady business over time, so it may hold up just fine. Fortune Brands is clearly being punished as high mortgage rates depress sentiment about the home market, but it could well be that the punishment has gone too far — the stock is trading at its lowest-ever valuation these days, right around 10X earnings. Analysts do think that 2022 is the peak earnings year for them, but they see earnings being relatively flat in future years, down 8-10% next year, but then back up to 2022 levels in 2024.

10X earnings is not necessarily cheap for a company that’s widely expected to have earnings that are more or less flat over several years, but perhaps there’s an under-appreciated opportunity in that cabinet spinoff, particularly if it lets them reduce their debt burden, and Moen and Master Lock are certainly valuable brands that are less-exposed to big home projects and homebuilding than is MasterBrand. In conjunction with the spinoff, they’re changing their name to Fortune Brands Innovations, which I guess also signals that they may expand on their plumbing and lock/safe/security businesses.

And one more…

“A large-cap communications services stock trading at a 61% discount to our estimate of its intrinsic value, whose shares have been pressured recently (down 41% ytd), chiefly by competitive fears impacting one of its businesses. By contrast, we see this share selloff as an opportunity to own a company with top-notch media assets that have good future growth prospects at an extremely attractive valuation. (Shares trade at just 8x on a P/E basis.) The Company has a very strong balance sheet (net debt/EBITDA: 2.3x) and returns significant value to shareholders via dividends (3.6% yield) and share buybacks, so the impending prospect for sale of a noncore asset should further bolster an already robust balance sheet and could portend an accelerated repurchase able to dramatically narrow the discount between the Company’s current market price and our estimate of its intrinsic value.”

Thinkolator sez the best match here is Comcast, which continues to be the monopoly leader for millions of customers when it comes to broadband services, with reasonably competitive streaming services helping to keep their cord-cutting in cable television from being completely catastrophic. They do have a wild amount of debt, about $100 billion, but their net debt is pretty close to 2.3X their trailing EBITDA (which came in at about $36 billion over the past year — just off of its highs from 2021, but still, surprisingly enough, much higher than in decades past). Comcast did say, last quarter, that what they call their “consolidated net leverage” was 2.3X, down from 2.6X a year ago.

People delight in predicting Comcast’s demise, as fiber to the home supplants coaxial cable and their expensive content business faces competition and their cable subscribers keep cutting the cord… and yet Comcast’s EBITDA over the past year was more than 50% higher than it was in 2012. Comcast has not typically been a super-expensive stock over the past 20 years, though it did have its moments at times in the pre-cord-cutting era, but it has rarely been anywhere near as inexpensive as it appears today.

Will Comcast sell some assets in the next year or two? I have no idea. They own a huge amount of valuable stuff, including NBC Universal, the Philadelphia Flyers and some of the pro sports facilities in Phladelphia, Sky Group, including a bunch of cable and content assets, and plenty of other entertainment properties… and they have certainly sold plenty of “non core assets” over the years, including parts of Time Warner, QVC, MGM, A&E, The Weather Channel and other smaller holdings.

The video business, their traditional cable television offering, still makes up a big chunk of the business, at about $5.4 billion in the last quarter, even though cable TV is shrinking (the shrinkage is still fairly slow)… but the numbers there are pretty easily dwarfed by their broadband ($6.1 billion) and business services ($2.4b) segments, and their wireless resale business and advertising business are both growing fast enough to make up for most of cable TV’s shortfall. NBCUniversal, the other very large business inside Comcast, is not nearly as profitable as the cable or broadband businesses… but the top line is growing pretty nicely from their media properties, film studios and theme parks. Sky, which is mostly a European pay-TV business, is shrinking with cord cutting as well, and has falling revenue, but is also becoming a bit more profitable.

It’s a lumbering beast, but it’s pretty cheap at about less than 9X earnings, and analysts are forecasting that they’ll be able to grow their earnings by about 10% a year for the foreseeable future. I don’t know what their value creation strategy will be, or whether they’ll make any major divestments that unlock some value (they are still controlled by the Roberts family, so they can sometimes shift their strategy quite quickly, and not always in popular ways), but certainly their lock on tens of millions of broadband customers should be valuable for a long time (it’s going to take many decades before their urban and suburban customers are upgraded to fiber connections — their coaxial cable wires reach into about half of the homes in the country, and at least half of those are active customers, many without reasonable broadband alternatives), and they’ve held up better than I would have expected with the switch from their cable TV focus to their broadband and content ownership focus.

Still, one must note that cable companies have been “value” darlings for many years… and that didn’t stop them from getting too richly valued and collapsing. Charter (CHTR) has been a simpler pitch than Comcast as a “value” opportunity, and also is very large, with lots of local monopolies, and soared to dramatic heights in the past five or six years… but also got clobbered with rates rising this year. Cable broadband as a local monopoly utility is a great business, but it’s also pretty capital-intensive, and sometimes they get valued just like other regulated utilities, which often means the stocks get punished when interest rates rise.

So... everyone seems to believe that we’re firmly in the transition to “value” and away from “growth” stocks… are these value ideas the kinds of stocks you think will hold up well in the volatile days to come? Have other favorite “value” stocks you think we should consider? Let us know with a comment below.