In this article, I selected five companies that have great growth potential in terms of stock price as well as dividend yield (Beckton Dickinson for instance). This sector is often hidden or forgotten but it does shelter jewels as far as stock value is concerned. One of the main characteristics of the industry is the high price of its products, with low cost, which of course generate high margins. The stocks in this article have modest earnings multiples, which increases the potential for higher returns in the future.
Mocon (MOCO, Financial)
The current stock price is around $16. Mocon has a dividend yield of around 2.5%. The share price has been fueled by excellent financial news, with net income close to 15% and operating cash flow above $5 million for less than $2 million in revenue. Mocon grew significantly as it opened a food safety unit in early 2011 headed by industry veteran Alan Traylor. The launch of Greenlight, a new bacterial detection system, enhanced cost effectiveness, which contributed to boost the stock value. Investors have been bullish on the stock throughout 2011 with a peak of more than $ 17 a share in late August and a valley of $14 in early September.
Mocon has two major competitors Agilent technologies and Perkin Elmer. Although those competitors make billions of dollars in revenue compared to the millions of Mocon, its revenue growth is one of the highest in the industry and most financial ratios (for instance gross margin, operating margin) exceed its competitors’ margins. These figures show that the stock has great earning potential: there is no reason for it not to reach EPS levels, which are similar to its competitors’. Therefore I would expect high yields to continue both in terms of dividend and stock. The stock price rose 25% from January 2011 to January 2012. For me this stock is a strong buy with very limited risks.
Electro-Sensor (ELSE, Financial)
The stock trades around $4. In its latest full fiscal quarter the company surprised investors with a 71% drop in cash flow. Electro-sensor took a hit but once the company announced the sale of its Auto-Data Systems division the stock price started to rise again. The company has a high dividend yield of around 4%. In addition with its current earning per share is at 0.15 with a price to earnings ratio of around 26, I believe there is potential for increase in the company’s EPS that can drive the share price up. It is the reason why I recommend it as a buy.
Although the stock dropped significantly (-11%) I think it will rise again to reach its early 2011 levels or higher, with increasing dividend payments. Electro-sensor’s biggest competitor is Danaher corp. with $ 36 billion in revenue and an EPS of around $ 3 compared to around $ 6 million and $0.15 for Electro-sensor. This comparison shows that the stock could rise given its current multiple.
Badger Meter Inc. (BMI, Financial)
The stock price is currently around $32 and has been on a downward trend since 2011. The company’s cash flow dropped from $37 million in 2009 to $18 million in 2010, which surprised investors. However I believe that since it bought Racine Federated in January of this year the stock should at least reach its 2011 levels. In my opinion, this acquisition was a smart move. The acquisition of Racine Federated will enable the company to penetrate adjacent markets, which should drive revenue up.
Badger Meter’s major competitors are Eister American Meter (privately held), Itron and Roper industries. While Itron shows net profit close to a 40% of revenue, Roper industries enjoyed a 5% net profit and $4 EPS compared to $1 for Badgemeter. This shows that the company’s EPS could increase significantly and generate high stock yields. The noticeable increase of the share price since January 2012 tends to confirm this analysis. I would be a buyer at a price of $35 per share or below.
Esco Technologies (ESE, Financial)
The stock trades around $30. After a drop in revenue in 2010 the company recovered with sales reaching around $ 693 million in 2010. Cash flow improved as well from $67 to $77 million. The share price has a target of around $39. This leaves a lot of upside for the stock. Esco Technologies’ competitors are among Fortune 500 companies: Itron, Oracle and Pall corporations, which make billions if not hundreds of billions of dollars in sales. Its financial ratios are very strong and similar to those players. It will deliver on its promises since it has a huge growth potential for its share price and maintains adequate levels of inventory, which make me confident that it is a strong buy around $30. The current price implies a margin of safety of approximately 20% given that shares are worth around $35 apiece on a discounted cash flow basis.
Beckton Dickinson (BDX, Financial)
The stock currently trades around $78. This is a very trustworthy stock, which is recession proof. The company has consistently delivered strong financial results with around $7 billion in revenue and $1.6 billion in operating cash flow since three years. Analysts are positive about the stock. I agree. In addition the company has kept increasing its dividends, with $1.8 per share or 2.3% currently.
Beckton Dickinson’s competitors are big players in the industry: Abbott, Baxter and Covidien. The firm, in spite of lower revenue than these companies, has a much higher EPS but a lower earnings multiple compared to the industry average. This is the reason why I believe that the stock still has a lot of earning potential. For me the stock is a buy under $80 per share. On a discounted cash flow basis, I value shares at $90 a piece using a 10% cost of equity.
In my opinion, investors can safely buy these five stocks, which will produce high returns and high dividend yields within the next three years.
Mocon (MOCO, Financial)
The current stock price is around $16. Mocon has a dividend yield of around 2.5%. The share price has been fueled by excellent financial news, with net income close to 15% and operating cash flow above $5 million for less than $2 million in revenue. Mocon grew significantly as it opened a food safety unit in early 2011 headed by industry veteran Alan Traylor. The launch of Greenlight, a new bacterial detection system, enhanced cost effectiveness, which contributed to boost the stock value. Investors have been bullish on the stock throughout 2011 with a peak of more than $ 17 a share in late August and a valley of $14 in early September.
Mocon has two major competitors Agilent technologies and Perkin Elmer. Although those competitors make billions of dollars in revenue compared to the millions of Mocon, its revenue growth is one of the highest in the industry and most financial ratios (for instance gross margin, operating margin) exceed its competitors’ margins. These figures show that the stock has great earning potential: there is no reason for it not to reach EPS levels, which are similar to its competitors’. Therefore I would expect high yields to continue both in terms of dividend and stock. The stock price rose 25% from January 2011 to January 2012. For me this stock is a strong buy with very limited risks.
Electro-Sensor (ELSE, Financial)
The stock trades around $4. In its latest full fiscal quarter the company surprised investors with a 71% drop in cash flow. Electro-sensor took a hit but once the company announced the sale of its Auto-Data Systems division the stock price started to rise again. The company has a high dividend yield of around 4%. In addition with its current earning per share is at 0.15 with a price to earnings ratio of around 26, I believe there is potential for increase in the company’s EPS that can drive the share price up. It is the reason why I recommend it as a buy.
Although the stock dropped significantly (-11%) I think it will rise again to reach its early 2011 levels or higher, with increasing dividend payments. Electro-sensor’s biggest competitor is Danaher corp. with $ 36 billion in revenue and an EPS of around $ 3 compared to around $ 6 million and $0.15 for Electro-sensor. This comparison shows that the stock could rise given its current multiple.
Badger Meter Inc. (BMI, Financial)
The stock price is currently around $32 and has been on a downward trend since 2011. The company’s cash flow dropped from $37 million in 2009 to $18 million in 2010, which surprised investors. However I believe that since it bought Racine Federated in January of this year the stock should at least reach its 2011 levels. In my opinion, this acquisition was a smart move. The acquisition of Racine Federated will enable the company to penetrate adjacent markets, which should drive revenue up.
Badger Meter’s major competitors are Eister American Meter (privately held), Itron and Roper industries. While Itron shows net profit close to a 40% of revenue, Roper industries enjoyed a 5% net profit and $4 EPS compared to $1 for Badgemeter. This shows that the company’s EPS could increase significantly and generate high stock yields. The noticeable increase of the share price since January 2012 tends to confirm this analysis. I would be a buyer at a price of $35 per share or below.
Esco Technologies (ESE, Financial)
The stock trades around $30. After a drop in revenue in 2010 the company recovered with sales reaching around $ 693 million in 2010. Cash flow improved as well from $67 to $77 million. The share price has a target of around $39. This leaves a lot of upside for the stock. Esco Technologies’ competitors are among Fortune 500 companies: Itron, Oracle and Pall corporations, which make billions if not hundreds of billions of dollars in sales. Its financial ratios are very strong and similar to those players. It will deliver on its promises since it has a huge growth potential for its share price and maintains adequate levels of inventory, which make me confident that it is a strong buy around $30. The current price implies a margin of safety of approximately 20% given that shares are worth around $35 apiece on a discounted cash flow basis.
Beckton Dickinson (BDX, Financial)
The stock currently trades around $78. This is a very trustworthy stock, which is recession proof. The company has consistently delivered strong financial results with around $7 billion in revenue and $1.6 billion in operating cash flow since three years. Analysts are positive about the stock. I agree. In addition the company has kept increasing its dividends, with $1.8 per share or 2.3% currently.
Beckton Dickinson’s competitors are big players in the industry: Abbott, Baxter and Covidien. The firm, in spite of lower revenue than these companies, has a much higher EPS but a lower earnings multiple compared to the industry average. This is the reason why I believe that the stock still has a lot of earning potential. For me the stock is a buy under $80 per share. On a discounted cash flow basis, I value shares at $90 a piece using a 10% cost of equity.
In my opinion, investors can safely buy these five stocks, which will produce high returns and high dividend yields within the next three years.
