Undervalued Micro-Cap Natural Alternatives, FCF/EV Yield 15%, Zero Debt – Small & Micro Cap Stock Screener

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Undervalued Micro-Cap Natural Alternatives, FCF/EV Yield 15%, Zero Debt – Small & Micro Cap Stock Screener

One of the cheapest stocks in our Small & Micro Cap Stock Screener is Natural Alternatives International Inc (NASDAQ:NAII).

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Natural Alternatives International Inc (NAII). is a formulator, manufacturer and marketer of nutritional supplements. The company operates through three segments: private-label contract manufacturing, patent and trademark licensing, and branded products.

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A quick look at NAII’s share price history over the past twelve months shows that the price is down 7%, but here’s why the company is currently undervalued.

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

As usual I like to start with the balance sheet. The latest balance sheet shows that NAII has $23 Million in cash and cash equivalents. Further down the balance sheet we can see that the company has zero debt. Therefore, NAII has a net cash and cash equivalents position of $23 Million (cash minus debt).

If we consider that NAII currently has a market cap of $70 Million, when we subtract the net cash and cash equivalents totaling $23 Million we get an Enterprise Value of $47 Million.

If we move over to the company’s latest income statements we can see that NAII had $12 Million in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 3.88, or 3.88 times operating earnings. That places NAII 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 NAII’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 NAII generated trailing twelve month operating cash flow of $15 Million and had $8 Million (ttm) in Capex. That equates to $7 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 15%. Further highlighting that NAII remains undervalued.

NAII has maintained solid growth over the past five years.  NAII’s trailing twelve month revenues of $125 Million are at historical highs. The company has also significantly improved its net profits in the past five years from $4 Million in 2012 to $9 Million (ttm) while maintaining gross margins around 22% and operating margins around 10%. Since 2012 NAII has also improved its EPS from $0.59 cents to $1.38 (ttm) and its book value per share from $5.66 to $8.63 (ttm).

In terms of its financial strength, the company has a very strong balance sheet with zero debt and ability to generate loads of free cash flow. NAII holds 33% of its current market cap in cash. Other financial strength indicators show that NAII has a Piotroski F-Score of 8, an Altman Z-Score of 8.17, and a Beneish M-Score of -2.87, so the company is financially sound.

With regards its current valuation, NAII is currently trading on a P/E of 7.4 compared to its 5Y average of 16.4*, a P/B of 1.2, a P/S of 0.5, a FCF/EV Yield of 15%, and an Acquirer’s Multiple of 3.88, or 3.88 times operating earnings, all of which indicates that NAII sits squarely in undervalued territory.

*Source: Morningstar

Jozef Bystricky over at Seeking Alpha also wrote a great piece on NAII in March this year called A Micro Stock With Significant Upside Potential in which he said:

The shift in strategy has resulted in higher revenue

Company management has made a couple of changes in its business strategy recently, as a result of which sales have increased significantly. For instance, the company decided to stop selling branded products, sell licensing and patents on its own rather than through distributors and increase its customer base. These initiatives have borne fruit, and NAII’s revenue skyrocketed. Sales in the licensing segment have doubled since 2015 and increased further by 30% in 1H 2017. In the private-label segment, the management focus was on increasing the customer base, and this has also worked handsomely recently, as sales increased more than 30% last year.

The company has also reported sales for 1H 2017 (six months ended in December), and again reported double-digit growth in each of its reporting segments.

About The Small & Micro Cap U.S. Stock Screener (CAGR 22%)

Over a full sixteen-and-a-half year period from January 2, 1999 to July 26, 2016., the Small & Micro Cap U.S stock screener generated a total return of 3,284 percent, or a compound growth rate (CAGR) of 22.0 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 265 percent, or 5.7 percent compound.

Article by Johnny Hopkins, The Acquirer's Multiple

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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.”

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