Ideas to Sink Your Teeth Into

 | Mar 25, 2013 | 2:00 PM EDT
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Even in today's constantly rising market environment, interesting ideas can be found here and there if you're willing to always be on the lookout. The hardest part, of course, is remaining disciplined enough to consider the merits and valuation companies amid such a consistent rally -- but that's the price of an endeavor with a big payoff. Otherwise everyone would be doing it. With that in mind, I came across a couple of intriguing names over the weekend.

First is IDT (IDT), a collection of assets whose main business is in offers prepaid and rechargeable phone cards. This telecom segment throws off quality cash flows, but it's a low-margin, competitive business. It also generated more than $1 billion in revenue during fiscal 2012 (ended July 2012), and it can generate up to $40 million a year in cash flows.

IDT shares currently trade for $11.30, with total market capitalization of $265 million. The balance sheet shows $174 million in cash against total debt of some $30 million. The current dividend of $0.60 implies a yield of 5.6% (though the company paid out its entire 2013 dividend at the end of last year).

In addition, IDT owns 80% of cloud-based storage-tech company Fabrix, based out of Israel. Fabrix is small -- $3.6 million in revenue in fiscal 2012 -- but is growing very rapidly. IDT management believes the company can bring in $20 million in cash flow this fiscal year. That may sounds optimistic. However, consider, in the first fiscal quarter, Fabrix signed a three-year deal with a cable company that brought in cash flow of $12 million.

Other intriguing assets include a large unoccupied office building in Newark, N.J., valued at $43 million against a mortgage balance of some $23 million. Regardless of whether that value is accurate, that is a healthy spread between. IDT also sits on $180 million worth of net operating losses, so the company won't be paying taxes anytime soon. That's good news for the security of the high dividend yield, as well as for future earnings. IDT also owns a couple of other minor assets, including a spectrum license portfolio, that perhaps are worth something.

Any way you look at -- the big cash pile, NOLs, Fabrix and everything else -- IDT is a very interesting idea that's worth digging into.

The other idea I came across is Arabian American Development (ARSD), a Texas-based company that makes specialty petrochemicals used in the manufacture of plastics. The firm also owns a 37% interest in Al Masane Al Kobra Mining, a miner of zinc and copper in Saudi Arabia. Arabian American is a small player -- $200 million market cap -- in an industry with large dominant players punctuated by Phillips 66 (PSX). The balance sheet is clean, with only $7 million in net debt, and shares trade for $8.30. Last December, a recent transaction valued its Al Masane property at $6.27 share, implying a value of $2 a share for Arabain's specialty-chemical business.

Even though it's a small player, Arabian has a lot of unique qualities. First, the purity of its chemicals is the highest of any competitor, except perhaps for Phillips 66. Customers prefer high purity, and they don't mind any additional cost, as the chemicals produced by Arabian represent a very minor cost percentage (1% or less) to its customers. The company's main feedstock is natural gasoline, as opposed to Phillips 66's crude oil. Natural gas is significantly cheaper than oil, so that bodes well for Arabian's margins. Its workforce is non-unionized -- also not the case at Phillips 66.

Over the next two years, Arabian expects to double its earnings before interest, taxes, depreciation and amortization to nearly $40 million. That would value the stock at 5x forward EBITDA -- and this is for an unleveraged company. The median multiple in the industry is 8x to 9x EBITDA, which is where Arabian is valued right now. Based on those assumptions, the company could double its market cap to $400 million in the next two years.

Understand that, at this stage, I term these good ideas, rather than investments. Ideas first need to be understood and analyzed by the investor before he or she dives in. That said, both IDT and Arabian American Development are excellent ideas worthy of a closer look for patient investors looking to perhaps add some smaller-cap names that have gone mostly unrecognized by Mr. Market.

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