Bottom-Fishing for Value

 | May 15, 2012 | 2:30 PM EDT  | Comments
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Stock quotes in this article:

untd

,

awc

Recent market volatility has led to an expanding list of stocks hitting 52-week lows. As the number of new lows expands, odds are you'll find a bargain swimming at the bottom. While I am not a follower of technical analysis, I have come to appreciate that more often than not when a stock price hits a new low, it often continues making new lows and burning investors who get sucked in. 

With that caveat, it is nonetheless a worthwhile exercise to peek at what is swimming at the bottom of the barrel. What I found is United Online (UNTD), a collection of three unrelated businesses that should not be united at all, the main jewel being FTD, a well-known brand in the floral and gift industry. Three-fourths of UNTD's revenue comes from FTD, as do the majority of the entire company's profits. The other two businesses are a content-and-media business and a communications business with brands such as NetZero and Juno. The communications business is shrinking but profitable: in 2011 revenues were $27 million, producing profit of $11 million.

United shares trade for about $4 and, believe it or not, the company currently yields a 10% dividend. The share price suggests that the dividend is unsustainable. Total debt exceeds $250 million against about $130 million in cash on the balance sheet. Annual interest expense is approximately $25 million, but the company has averaged more than $100 million in free cash flow per year over the past three years. Currently, the annual dividend payout is approximately $36 million, so for now it seems that dividend is safe. Also note that with a current enterprise value of $485 million, UNTD is changing hands at nearly 4x free cash flow.

Another on this list is Alumina (AWC), an Australian-based aluminum and chemical producer via a 40% interest in Alcoa World Alumina and Chemicals. Alcoa (AA), the  largest aluminum producer in the U.S., owns the other 60%. It has interests in eight refineries and eight bauxite mines, as well as operating two aluminum smelters in Victoria, Australia. The company also owns interests in a network of mines, refineries, and smelters in the U.S., Guinea, Suriname, Jamaica, Brazil and Spain.

The AWAC partnership has been very good for Alumina. Since the partnership began in 1995, AWAC has distributed more than $3.5 billion in dividends to Alumina. Alumina shares currently trade for about $4, it has a market cap of $2.2 billion, and its yield is 6%. Shares also trade at a 15% discount to book. In 2006, the dividends paid to Alumina by AWAC peaked at $500 million. Since then, the dividends have declined and hit a low of $160 million in 2009 but are starting to rebound. Alumina offers an interesting, income-producing way of playing an industrial recovery.

When you bottom-fish, you can expect to find a lot of dead fish. But every once in a while, you'll reel in a lively catch.

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