Value Line Is a Value Play

 | Mar 19, 2012 | 3:30 PM EDT
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For fundamental, data-driven investors, the Value Line Investment Survey remains an indispensable tool for researching equities. When I visited Warren Buffett in his office back in 2007, his copy of Value Line was within easy reach. Even easier to reach today are shares of Value Line (VALU).

Since Value Line's humble beginnings in 1931, its one-page company analysis reports have become famous for their simplicity and high-quality data. What makes the Investment Survey unique is that Value Line is an independent research company, not a buy-side or sell-side shop. Many investors, either through a subscription or a visit to the local library, have examined the pages of Value Line at least once. 

Over the past 60 years, Value Line has expanded its offerings, as one might expect. From an initial product that surveyed the most widely held stocks, Value Line has branched out to include a small-cap survey and other periodicals that examine mutual funds, convertible securities and options, and even a special-situations periodical that examines two stocks every month. For some investors, the Internet has become a viable substitute for Value Line, but anyone who takes more than a passing interest in stocks appreciates what Value Line has to offer. In a single page, you get statistical data spanning 10 years, delivered in an easy-to-understand and effective format. 

While Value Line competes with a wide plethora of other newsletters and websites, the company's product remains indispensable for many investors. And at today's valuation, the shares may be too cheap to pass up. Shares currently trade at $11.60, for a market cap of $112 million. Shares trade at a trailing P/E of less than 3, but that is because the company recorded a one-time non-cash accounting gain of $50 million last year. For the nine months of fiscal 2012 ending April 30, 2012, Value Line has earned $0.60 a share, so the current price-to-earnings ratio is actually meaningless.

But this is not an investment based on a P/E. Value Line currently pays out a $0.60 annual dividend, which is good for a 5.3% yield at today's prices. Operating cash flow is more than adequate to cover this $6 million annual payout. Also, the company sits on a pristine balance sheet that includes $10 million in cash and no debt. Better still, it enjoys a return on equity in excess of 30% and return on invested capital of over 50%. 

Alternatively, one can look at Value Line as a financial play with the financial risk but with a yield that was once coveted by financials. While lending is in the doldrums, names such as Morgan Stanley (MS) Bank of America (BAC) and JPMorgan  (JPM) are focusing on the asset-management and advisory parts of the business, where growth looks more attractive, and that is what Value Line focuses on exclusively. While the big banks are itching to increase payouts, Value Line already does that.

But the real catalyst is the company's newest service, Value Line Pro, which it launched this month. Value Line Pro is an institutional sales website targeted to investment advisers, portfolio managers and corporate professionals. These clients are excellent customers and usually long-term subscribers, since the cost of the service is very negligible and often paid for by the business.

Value Line Pro could be the growth kicker that Value Line needs. If that turns out to be case, then shares won't be yielding 5.3% for long, as investors will pile into a growth play with such a high payout. In the meantime, the steady cash flows and the balance sheet secure the dividend for the foreseeable future. In addition, the demand for investment products and services follows the performance of the stock market, and right now, market performance looks attractive. Put that all together, and Value Line offers 5.3% while you wait for a lot of good things to happen to an already cheap stock price. 

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