Undervalued Argan Inc, FCF/EV Yield 66%, ROE 26%, Zero Debt- All Investable Stock Screener

One of the cheapest stocks in our All Investable Stock Screener is Argan Inc (NYSE:AGX).

Argan, Inc. (Argan) is a holding company. The company conducts operations through its subsidiaries, Gemma Power Systems, LLC and affiliates (GPS), Atlantic Projects Company Limited (APC), Southern Maryland Cable, Inc. (SMC) and The Roberts Company (Roberts or TRC). The company’s segments include power industry services, industrial fabrication and field services, and telecommunications infrastructure services.

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A quick look at Argan’s share price history over the past twelve months shows that the price is up 47%, but here’s why the company remains undervalued.

The following data is from the company’s latest financial statements, dated March 2017.

As always I like to start with the balance sheet. The latest balance sheet shows that Argan has $167 Million in cash and cash equivalents and $396 Million in short term investments which equates to $563 Million in cash and cash equivalents. Further down the balance sheet we can see that the company has zero debt. Therefore Argan has a net cash and cash equivalents position of $563 Million (cash minus debt).

Argan currently has a market cap of $943 Million, so if we subtract the net cash and cash equivalents totaling $563 Million we get an Enterprise Value of $380 Million.

While we’re still on the balance sheet, for the most recent quarter ending March 2017 Argan had net income of $79 Million (ttm). At the same time the company had total equity of $314 Million (ttm) compared to $292 Million for the previous quarter ending January 2017. That equates to an annualized return on equity (ROE) for the quarter ending March 2017 of 26%.

If we move over to the company’s latest income statements we can see that Argan had $124 Million in operating earnings over the trailing twelve months which means that the company is currently trading on an Acquirer’s Multiple of 3.06, or 3.06 times operating earnings. That places Argan squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

In addition to Argan’s very strong balance sheet it’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Argan generated trailing twelve month operating cash flow of $256 Million and had just $4 Million (ttm) in Capex. That equates to $252 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 66%. Further highlighting that Argan remains undervalued.

To provide some context on Argan’s current financial position here’s some historical comparisons.

  • Argan’s trailing twelve month revenue of $775 Million is the highest in the company’s history
  • Argan’s trailing twelve month net income of $79 Million is also the highest in the company’s history
  • Argan’s trailing twelve month EPS of $5 has grown 646% since 2012
  • Argan’s trailing twelve month Book Value per share of $20.25 has grown 173% since 2012
  • Argan’s trailing twelve month free cash flow of $252 Million has grown 227% since 2012

Argan is a on a solid growth path. The company has a very strong balance sheet with zero debt and ability to generate loads of free cash flow. Based on its latest trailing twelve revenues of $775 Million, Argan converts $0.32 cents of every dollar into free cash flow. The company remains financially strong, as of today Argan has a Piotroski F-Score of 6, an Altman Z-Score of 3.89, and a Beneish M-Score of -3.50.

In terms of Argan’s valuation. The company is currently trading on a P/E of 12.1, a P/S of 1.2, a FCF/EV Yield of 66%, an ROE of 26%, and an Acquirer’s Multiple of 3.06, or 3.06 times operating earnings, all of which places Argan squarely in undervalued territory. The company also provides a nice little dividend yield of 2%.

Disclosure: I am long Argan Inc.

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”