STOCK PICKS: Top 5 Small-Caps for July 4
TheStreet.com Ratings Staff
07/04/08 - 06:59 AM EDT
Each business day, TheStreet.com Ratings compiles a list of the top five stocks in five categories -- fast-growth, all-around value, large-cap, mid-cap and small-cap -- and publishes these lists in the Ratings section of our Web site.
This list is based on data from the close of the previous trading session. Today, small-cap stocks are in the spotlight. These are stocks of companies that have market capitalizations of between $50 million and $500 million that rank near the top of all stocks rated by our proprietary quantitative model, which looks at more than 60 factors.
The stocks must also be followed by at least one financial analyst who posts estimates on the Institutional Brokers' Estimate System. They are ordered by their potential to appreciate.
Note that no provision is made for off-balance-sheet assets such as unrealized appreciation/depreciation of investments, market value of real estate or contingent liabilities that might affect book value. This could be material for some companies with large underfunded pension plans.
Balchem(BCPC Quote) develops, manufactures and markets specialty performance ingredients and products for the food, feed and mechanical sterilization industries. Balchem produces choline products for both human and animal consumption. Choline, a vitamin-B complex, plays a vital role in the metabolism of fat and the building and maintaining of cell structures.
Balchem also produces encapsulated performance ingredients for use throughout the food and animal-health industries in products such as baked goods, refrigerated and frozen dough, processed meats, seasoning blends and confections. These performance ingredients are used to enhance nutritional fortification and improve shelf life of prepared products.
Our buy rating for Balchem has not changed since June 2003. The company reported record quarterly results in net sales and net earnings for the first quarter of fiscal 2008. Balchem achieved net sales of $56.9 million, reflecting a 34.9% increase compared to the same quarter one year prior. Net earnings increased 34.9% year-over-year to $4.6 million. As a result, the company's net earnings per diluted common share increased 31.6% to 25 cents from 19 cents in the first quarter of 2007.
Management reported that the integration of several acquisitions made during fiscal 2007 have gone well, and stated that the first-quarter results did not yet reflect the company's full expectations for those acquisitions. Additionally, management noted again that rising raw material costs are expected to remain a challenge for Balchem in the near term. While the company has taken pricing steps to counteract the effects of these increased input costs, the actions taken in the first quarter did not offset all the cost increases, primarily due to timing.
Overall, management expects the remainder of fiscal 2008 to continue to bring double-digit increases in sales and earnings. Bear in mind, however, that global economic issues could affect the company's results.
Quaker Chemical(KWR Quote) develops, produces and markets a broad range of formulated chemical specialty products for various heavy industrial and manufacturing applications. In addition, the company offers and markets chemical management services. Quaker serves the automotive, steel finishing, heavy equipment, aerospace, tube and pipe, and bearing manufacturing industries worldwide. The company is headquartered in Pennsylvania.
We have rated Quaker Chemical a buy since May 2007 because of strengths such as robust revenue growth, an impressive record of earnings per share growth, and a largely solid financial position. For the first quarter of fiscal 2008, the company reported record quarterly sales and revenue growth of 18.3% year-over-year. Earnings per share improved 42.9% compared to the same quarter a year ago, rising from to 50 cents a share. Quaker's current debt-to-equity ratio is somewhat low at 0.67, although it is high compared to the industry average. Despite rising material costs, Quaker had a 6% improvement in operating income as a percentage of sales for the first quarter.
Management stated that it remains confident about the company's long-term future and the potential for improved earnings in fiscal 2008. Bear in mind, however, that overall customer demand for products greatly impacts Quaker's financial performance, so any downturn in its customers' businesses could negatively impact results, as could any unexpected shutdown in customer production. Increases in the costs of raw materials and overall economic and market conditions worldwide could also affect Quaker's future performance.
Integral Systems(ISYS Quote) builds satellite ground systems and equipment for command and control, integration and testing, data processing, and simulation. Founded in 1982, the company supports satellite missions for communications, science, meteorological and resource applications. Most of Integral Systems' sales involve a combination of commercial-off-the-shelf software and hardware products together with development services.
Integral Systems has been rated a buy since March 2005. This rating is supported by the company's growth in revenue and net income, largely solid financial position, and impressive record of earnings per share growth. For the second quarter of fiscal 2008, the company's revenues leaped 54.6% year-over-year, which in turn helped boost its EPS from 19 cents in the second quarter of fiscal 2007 to 44 cents in the most recent quarter. Net income increased 85.5% when compared to the same quarter one year prior. The company experienced strong financial results and growth in all three of its operating segments. Additionally, Integral Systems has no debt to speak of, which we consider to be a relatively favorable sign, and appears to be able to cover short-term liquidity needs.
Management announced that the company anticipates another year of record revenue and earnings, given that all three of the operating segments are performing better than expected. Fiscal 2008 EPS is now estimated at $1.90 a share. While the company currently shows relatively low profit margins, we feel that its strengths should help its stock price move higher despite having already experienced a very nice gain of 75.4% over the past year.
Key Technology(KTEC Quote) designs, manufactures, sells and services process-automation systems that integrate electro-optical inspection and sorting, specialized conveying, and product preparation equipment. Automated inspection systems are used in a various applications to detect and eliminate defects, most often during the processing of raw and semi-finished products.
Key Technology has been rated a buy since February 2007. The company's strengths can be seen in a variety of areas, including its growth in revenue, net income, and earnings per share. For the second quarter of fiscal 2008, the company's revenue rose by 31.3% year-over-year. This appears to have helped boost earnings per share, which improved significantly from 11 cents in the second quarter of fiscal 2007 to 22 cents in the most recent quarter. The net income increased 96.4% when compared to the same quarter one year prior, rising to $1.19 million from about $600,000. An additional sign of strength for the company is that its current return on equity improved from the same quarter of fiscal 2007.
The recent surge in commodity costs is a challenge to the machinery industry. This could affect Key Technology's results in the future. However, the company reported its best first half bookings, shipments and earnings performance in its history in this fiscal year, and management expects that recently released new products, such as Manta and the Pulse Scrubber, will contribute to the company's orders and shipments for the second half of fiscal 2008.
Stepan(SCL Quote) is a global manufacturer that produces specialty and intermediate chemicals. These products are sold to other manufacturers to be made into a variety of end products.
We have rated Stepan a buy since May 2007, based on strengths such as its robust revenue growth, solid stock price performance and compelling growth in net income. For the first quarter of fiscal 2008, Stepan's revenue rose by 21.9% year-over-year. This in turn appears to have helped boost earnings per share, which increased from 56 cents in the first quarter of fiscal 2007 to 85 cents in the most recent quarter. Net income grew 53.8% when compared to the same quarter a year ago, rising from $5.69 million to $8.75 million. Stepan also reported that its gross profit increased 32% due to a significant improvement in earnings from its surfactants business.
Management announced that it was pleased with the company's progress in the first quarter as efforts to improve the customer and product mix contributed to the increased profitability of Stepan's global surfactant business. Looking forward, management anticipates continued profit growth compared to last year, despite their concerns about the potential impacts of a recession.
Our quantitative rating is based on a variety of historical fundamental and pricing data and represents our opinion of a stock's risk-adjusted performance relative to other stocks.
However, the rating does not incorporate all of the factors that can alter a stock's performance. For example, it doesn't always factor in recent corporate or industry events that could affect the stock price, nor does it include recent technology developments and competitive dynamics that may affect the company.
For those reasons, we believe that a rating alone cannot tell the whole story and that it should be part of an investor's overall research.
