3 Small Cap Stocks With Good Value

Anthony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the small-cap sector, I have located three companies that are producing strong cash flows relative to their share price in addition to having strong fundamentals.  These stocks may provide deep value to investors.  

How to find these stocks

My screen had the following criteria:

  • Market cap qualifying them as a small cap
  • Earnings per share growth of 20% or more for current fiscal year (forecasted)
  • ROA TTM of greater than 10%
  • A price to cash flow ratio TTM of between zero times to five times

The candidates this screen produced were American Axle & Manufact. Holdings, Inc. (NYSE: AXL)Carmike Cinemas Inc. (NASDAQ: CKEC), and Nextar Broadcasting Group Inc. (NASDAQ: NXST). The following is a chart of the companies' share price performance over the past year compared against that of the S&P 500.

<img alt="" src="http://media.ycharts.com/charts/383f97db605bdd66c4fe12ad9c23eb50.png" />

AXL data by YCharts

As the chart shows, these companies have performed extremely well collectively over the past year.  This can be expected due to their strong fundamentals which are as a result of good financial performance.  

American Axle - a Well Oiled Machine

Over the past year, American Axle's return has tripled that of the S&P 500.  Last week it reached a new 52-week high of $17.93 per share.  Analysts expect the company to earn $1.76 per share this year, which would be up from $1.20 per share last year.  Next year, earnings are expected to jump to $2.66 per share.  Over the next five years, its annual growth rate is forecasted to be 22.5%.  Recently, earnings estimates have been increased for all of the company's future releases.

In the quarter that ended in March of 2013, the company earned $0.23 per share, which beat the consensus estimate calling for $0.16 per share in earnings.  The company supplies parts for General Motors and Chrysler, and the Detroit-based business saw better than expected results from these operations in the first quarter.  For instance, full-sized pickup sales are up 24% this year so far through April.

In looking at the company's first quarter results, it is noted that General Motors makes up the majority of its revenue.  A key initiative achieved in the quarter was the fact that the company successfully restructured some of its higher interest debt by issuing new $400 6.25% senior notes due in 2021.  This is part of its move to shore up its balance sheet.

Sales increased by a modest 1% and were partially affected by the labor strike at one of GM's factories.  Its content-per-vehicle (dollar value of its products to its customers) increased to $1,504 per vehicle in March of 2013 from $1.75 per vehicle in March of 2012.  General and administrative expenses also decreased modestly, which helped profits. Continuing increases in sales of American cars and a rebounding housing market can fuel further sales gains.  

The View of Carmike Cinemas

Carmike Cinemas is currently trading at $17.75 per share and is close to its 52 week high.  Despite being the weakest performing stock out of the three highlighted here, the company has been a strong performer over the past year.

Analysts estimate that the company will earn $0.85 per share this year, which would be up from $0.61 per share last year.  Next year, earnings are forecasted to be $1.30 per share.  Over the next five years, analysts expect 12.5% annual growth.  The company badly missed earnings estimates for the quarter ending in March of 2013 by losing $0.20 per share compared with an estimate calling for $0.07 per share in earnings.  Despite this earnings miss, the company has recently been upgraded by more than one analyst.

Carmike Cinemas owns the Rave cinemas, and it recently agreed to have MovieTickets.com sell advance tickets for these locations.  May and June will include many large movie releases, which some predict will fuel sales increases for Carmike.

In its most recent earnings report, higher expenses lead to the unexpected loss in earnings per share.  Average admissions per patron and average concessions dollar value per patron increased nicely in the quarter ending in March of 2013 compared to the quarter ending in March of 2012.  Total admission revenue declined year over year for this quarter, but total concession revenue increased.  Strong performance in the upcoming movie releases for its cinemas is a key factor necessary to bring the company back to profitability.  

Nexstar Broadcasting is on a Roll

Nexstar Broadcasting has been the strongest performing stock out of these three over the past year.  It is currently trading at $27.26 per share, which is a far cry from its 52 week low of $6 per share.  It also has a current dividend yield of 1.7%.

Analysts estimate that earnings will rise to $1.10 per share this year, which would be up from $0.84 per share last year.  Next year, analysts call for an astonishing earnings per share number of $3.01.  Over the next five years, it is pegged for 2% annual growth in income as it looks like the current estimates are not calling for much of an increase after next year.

In the quarter that ended in March of 2013, earnings came in at $0.02 per share, which was below the estimate of $0.12 per share.  Despite this earnings miss, Wells Fargo notes that the company has a $5 per share free cash flow number which shows the company's strong value.  Revenue for the quarter ending in March of 2013 rose to a record $112 million, which represented a year over year increase of 34.2%.

Station revenue, fueled by core television ad revenue, rose by a stellar 40% year over year in the quarter ending in March of 2013.  Retransmission fees and e-Media revenue rose 62.7% year over year to $30 million.  Going forward, continuing this overall increase in revenue as well as successfully integrating its recent acquisitions are keys to its success.  The acquisition of 19 additional television stations will have to be successfully managed and integrated.

Conclusion

These stocks clearly all have upward momentum in share price going for them as well as strong fundamentals.  An earnings miss for any of them going forward could lead to a drop in price if future guidance cannot offset that effect.

Despite the risks, I think these are great stocks overall for the long-term.  The one I like here the most is American Axel.  I believe the American automotive market will continue to improve, as the nation is committed to seeing the automotive industry succeed.  

The staggering revenue growth of Nexstar is hard to ignore also.  I would look for a short-term dip in price though before I jumped in.

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Anthony Parsons has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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