Debt-Ceiling Standoff Awakens Value Investors

Xyratex (XRTX)

Company Profile: Xyratex is a provider of enterprise-class data storage subsystems and network technology

AFAM's Target Price: $19.09

Potential Upside From Current Levels: 103%

Clark's Take: With a 30% market share, Xyratex should benefit from favorable trends as corporate spending increases for technology upgrades and data hungry global consumers boost demand for personal electronics, Clark says, despite fierce competition and consolidation in the data-store sector.

"We are encouraged by management's proactive actions to better serve its larger clients, diversify its customer base and potentially seize market share," Clark says. "Industry consolidation, in particular, was cited as a reason for the company's recent second quarter shortfall as pending regulatory reviews appear to be prolonging capital investment decisions. Fortunately, the company is planning further reductions in fixed costs to help ride out this temporary period of uncertainty."

Clark notes that Xyratex shares currently trade with a price-to-book multiple of 0.9, a price-to-sales ratio of 0.2 and an enterprise value-to-EBITDA multiple of 2.6, "all of which are substantially below historic five-year averages. The long-term-debt-free balance sheet is also a huge plus, especially as it boasts over $4 per share in cash."

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Cooper Tire & Rubber (CTB)

Company Profile: Cooper Tire & Rubber is the fourth-largest North American tire producer, exclusively manufacturing replacement tires.

AFAM's Target Price: $34.97

Potential Upside From Current Levels: 107%

Clark's Take: Cooper Tire has faced headwinds due to higher commodity costs, with the stock down 27% this year. However, Cooper has so far been able to pass those price increases along to customers with little resistance. Clark says his firms likes that Cooper is in the replacement tire arena and therefore should not be significantly affected by any future struggles of the big auto makers.

"In addition, the choppy economy and high unemployment rate have given the replacement tire market new life as data suggest car owners are keeping their vehicles longer," he says. "We are optimistic about the company's growth potential overseas, especially in China, and we like that it is rolling out new higher-margin, ultra-high performance and commercial tires."

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