14 February 2006

Three stocks priced 50% or more below Morningstar's fair value

Beautiful blizzard this weekend. On such a snowy Sunday, I had my first snowboarding experience--in Riverside Park, of all places. Didn't fall as much as I expected, but my ass did find a bit of concrete under the 26 inches of snow once. But after a quickly-muttered "ouch", I gracefully got back on my own two (bound to a slippery board) feet. When I say gracefully, I mean something completely different.

Speaking of falling, I found three stocks using stock screening tools at Morningstar. I wanted some real outliers, so I requested stocks that are priced at 50% or more below Morningstar's fair value. What each stock shares in common is a precipitously falling chart and membership in a very exclusive club.

The three are Domstar (DTC), Lear (LEA), and TVL.

Here's some extensive research, Dykstra-style (i.e. cribbed from Morningstar):

DTC: Canada-based Domtar is one of North America's leading integrated paper and forest products producers. The company maintains four operating divisions. Its flagship paper division produces coated and uncoated paper. The company is also involved in the distribution, warehousing, and marketing of paper products, timber harvesting, and lumber manufacturing. Its packaging division, a 50%-owned joint-venture operation, produces corrugated packaging material and containers.

DTC closed yesterday at $4.86. Morningstar's fair value for the stock is $10.00.

Why the disparity?

Paper is a commodity, with the attendant slim profits and minimal pricing power that comes with the production of a fungible good. Contributing to these economic constraints are higher prices for energy and pulp. DTC is countering these effects by restructuring, cutting costs and closing inefficient plants. Buying DTC shares is not a speculative bet on a company growing from nothing into something--it's a value bet that DTC will eventually rebound and generate profits from its significant operations.

LEA: Lear is a leading provider of vehicle interiors, including seating, flooring, door panels, and electronics. The company employs more than 110,000 people worldwide with revenue of about $17 billion. The seating segment makes up about two thirds of revenue, about another fifth comes from interiors, and the remainder comes from electronics. Lear has been named the most admired company in the auto-parts sector by Fortune magazine.

LEA closed yesterday at $22.36. Morningstar's fair value for the stock is $56.00.

LEA also has issues with commodity costs and restructuring plans. It's also dependent on those two decaying pillars of the American economy, GM and Ford.

But like DTC, LEA is one of the top companies in its sector.

TVL: LIN TV is a pure-play television company with operations in the United States and Puerto Rico. At Dec. 31, 2004, LIN operated 23 stations, including two under local marketing agreements and three low-power stations, along with equity investments in five other stations. The company has stations affiliated with eight networks.

TVL closed yesterday at $11.08. Morningstar's fair value for the stock is $28.00.

Morningstar likes TVL's Puerto Rican-focused content that it is now distributing throughout the contiguous 48 states as well as on the island. Morningstar also likes TVL's stations in places like Austin, TX, Indianapolis, IN, and Norfolk, VA, and the fact that in even years, political ad revenue drives up income.

On the downside, TVL spends too much on asset acquisition, leaving a crummy ROIC. TVL has a high debt load, and Morningstar is, well, skeptical of management.

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