RealMoney Silver - Wallflowers: Landauer Radiates Strength

Wallflowers: Landauer Radiates Strength
By Bill Trent
RealMoney.com Contributor
5/22/2008 7:11 AM EDT

This is the next entry in an ongoing series of stories focusing on companies that have little or no Wall Street following. These firms are often referred to as "wallflowers." Many times, shares of these companies are quite undervalued, as most portfolio managers do not get a chance to hear their story. Today, we're looking at Landauer, which is followed by just two analysts.

Landauer (LDR) is a leading provider of radiation detection monitors to hospitals, medical and dental offices, universities, national laboratories, nuclear facilities and other industries in which radiation poses a potential threat to employees.

Its services include the analysis and reporting of exposure findings using proprietary technology licenses expiring between 2011 and 2015, and patents expiring from 2017 through 2024. The company has a $525 million market capitalization and coverage from just two Wall Street analysts.

The company's agreements with customers generally provide radiation monitoring services for a 12-month period, and such agreements have a high degree of renewal. The customer base is diverse and fragmented, with no single customer representing greater than 2% of revenue. Thus, even with a fairly limited amount of growth in new customers, the business provides stable revenue over time.

The business is considered to be mature, and growth in numbers of customers has been modest. However, growing interest in nuclear power worldwide, homeland security needs and growth in the health care market could potentially bump up the growth rate. The only significant competitor in the U.S. is Global Dosimetry Solutions, a division of Mirion Technologies. Other competitors in the U.S. that provide dosimetry services tend to be smaller companies, some of which operate on a regional basis.

Acceleration Ahead

Although sales increased about 9% year over year in the first half, deferred revenue is up 10% in just the last six months. Since deferred revenue will be recognized as sales in a future period, the fact that it is growing at a faster rate than sales could signal growth acceleration ahead. Management's guidance for fiscal 2008 anticipated revenue growth for the year to be in the range of 4% to 5%, and a net income increase in the range of 6% to 8%. On the latest conference call, management raised guidance to the upper end of the planned ranges, but the deferred revenue indicates that there remains room for upside surprise.

At 23 times estimated fiscal 2008 (September year-end) earnings, Landauer is trading in line with its five-year average price-to-earnings ratio. Of course, the two analysts covering the company have barely budged their estimates over the last 90 days despite 4 cents of combined upside surprise in the last two reported quarters. If the company continues to beat estimates, the stock will prove to have been selling at a below-average multiple.

Risk/Reward Looks Right

Landauer's free cash flow over the last 12 months has totaled $25 million, which amounts to a 4.75% yield against the market capitalization and 5% against the enterprise value. Either way, the premium over five-year Treasuries is about 175 basis points. Only modest growth would be needed for the total risk premium to be attractive to me.

The 3.5% dividend yield alone is in line with the yield on Treasuries (and taxed at a more favorable rate), so any price appreciation would compensate for the added risk. Alternatively, the company's high (40%) return on equity suggests that either growth could accelerate without requiring additional capital, or the payout ratio could be increased, allowing for an even higher dividend.

With no debt to pay off and cash piling up on the balance sheet, I think it is only a matter of time before Landauer starts returning it to shareholders or finding other productive uses for it. Either way, stockholders could be richly rewarded.