Tangible (Book Value) Results

NEW YORK (TheStreet) -- One year ago, I revealed a list of seven companies -- Corning (GLW), Hess (HES), Rowan (RDC), Patterson-UTI (PTEN), Omega Protein (OME), Kelly Services (KELYA) and American Greetings, a company bought out in August -- that were trading below tangible book value per share.

That measure takes the more commonly used book value per share calculation (shareholders equity divided by shares outstanding), and strips out intangible assets such as goodwill, patents and trademarks. The theory here is that intangible assets can have little real value and may skew a company's true book value; it's simply a more conservative view of book value and is often used by the value crowd.

That group of companies has returned an average of 50% since that column ran, versus 28% for the S&P 500 and 38% for the Russell 2000. Rather than simply screening for companies trading below tangible book, the screen I use for this search includes several other criteria:
  • No financial companies
  • Long-term debt to equity less than 50%
  • Companies must be profitable on a trailing 12-month basis
  • Minimum market cap $100 million
Five of the qualifying companies returned more than 50%. Corning, Hess, Patterson, and Kelly were all in the 50% range, while fish oil and fish meal producer Omega Protein more than doubled. The two laggards were Rowan, up 16%, and American Greetings, up 14%. In August, American Greetings was taken private by the Weiss family, who already had controlling interest in the company.

While I am pleased with the results of this screen, I know they occurred in an up market, and the real test is performance when the markets are pulling back. The theory is that tangible book value can create a potential floor value in a stock price; that the price should not deviate too far below tangible book value. Of course, companies in distress can and will deviate from that theory.

In order to avoid such situations, I have included a couple of criteria in my screen -- profitability on a trailing 12-month basis, and debt to equity ratio below 50% -- that should help guard against the inclusion of troubled companies.

Despite the run-ups in stock prices, the six remaining publicly traded companies now trade at an average of 1.23 times tangible book value per share, still on the low side. Rowan is the only remaining company trading below tangible book value.

Corning continues to be the most intriguing company in the group. Trading at just 11 times the average earnings estimate for 2014, the stock yields 2.4%, and the company has raised the dividend three times in the past two years. Furthermore, the strong balance sheet, with $5.4 billion, or $3.76 per share, in cash and short-term investments can support further dividend increases. The company has also been buying back stock, and has reduced shares outstanding by more than 7% since year-end 2011. At the end of last quarter, total debt stood at just $2.8 billion. GLW Chart GLW data by YCharts

I'll publish a new list of companies trading below tangible book value next week, although, given the markets run-up, I expect the pickings to be rather slim.

At the time of publication, the author was long Corning.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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