Analysis of TESSCO Technologies Inc.


Using the DFG stock screen, TESS ranked number one for the month of May.  What was it the screen found as I haven't heard much on this company before?  Let's take a closer look at my four categories to find out.

Haven't done one of these analysis posts in some time so I am a bit rusty.  Not having any capital to deploy I still screen and look at the top ten to see if any are worth watching and that is about it.  Taking a deeper dive into one of those companies takes a little bit more time but I have some time now so why not.

According to their site they are the one stop shop for setting up or fixing wireless technologies for carriers or companies.  They not only want to design cell phone towers but also act as the supply chain for any and all parts needed to construct that tower and get it functional.  Wireless is big business but is also capital intensive.  So TESS aims to capture most of that capital by providing the most efficient and high quality service to the carriers.

Value
When I performed the screen the P/E was high at 18.05.  Looking on Morningstar the forward P/E is looking more favorable at 9.2.  As with most dividend investors to get the most bang (yield) for your buck you want to buy stock when value presents itself (< 20 P/E).  This stock is looking more favorable in the near future but the drop needs further looking at.  Earnings for the year and the big miss in the beginning of May are most likely the cause of the drop.  However future earnings growth YOY for next year are back in the positive range around 12%.

The other ratio I like to look at when determining value is the price-to-sales, P/S, ratio.  Are you getting the value for each share you purchase compared to how much revenue they are generating from sales?  When this dips below 1 this is a good sign and presents an opportunity to get in (if future sales continue to grow).  TESS is sitting at a nice ratio of 0.3 when the screen was done.  They just wrapped up FY2015 and are forecasting a slightly better earnings for 2016.

Growth
After the 4th quarter earnings of $0.01 per share it is no wonder the price has gone down.  What does long term growth look like?  I like to look at the past to help in predicting the future and this year I switched over to looking at the Forward PEG.  It is important to make sure the earnings are in line with the price you're paying.

Over the past five years the average growth is 18.8%  Double digit growth rates are always good but this year was a big slow down.  YOY EPS for the past twelve months has gone in the negatives with a -62.26%.  Looking over the past 5 years it has been swinging around.  At least when you look at the earnings per share it seems a bit more stable and was growing nicely until 2014.


1.20 was the PEG at the beginning of the month before the price dropped after the earnings miss.  The forward PEG will most likely be more attractive if the stock price remains low and earnings grow for the rest of the year.  1.20 is not bad but we want to make sure earnings are going the right direction before pulling the trigger.

Quality
Quality factors like how is the company managing debt and how it is spending its money are signs of how management is running the business.  Again we like to see low numbers on this part of the screen.  Under one is best for Price-to-book ratio but 1.8 for the last quarter is not bad either.  The next quarter for TESS should look even better if the price remains where it is at.  Looking at the chart above you can see the steady climb of the value of a share with regards to the book value of the company.

The debt-to-equity ratio has been so small (way under 1) since 2005 that I didn't bother adding it to the graph this time around.  The highest was in 2005 when it was only 0.08.  This is great management of your debt if you ask me.   The only downside is being a one stop shop they tend to carry allow of inventory  and other assets.  You have to generate enough cash to keep the capital flowing to be a supply chain so the recent down year might affect the quality  if cash runs out.  With that said do they even have enough cash to increase the dividend?

Yield
When the screen was done in the beginning of May the yield was at a respectable 3.17.  It has since climbed to around 4.43% because of the earnings miss for their last fiscal quarter for 2015.  In the 4's isn't bad if it represents an opportunity to buy a good company during a rough patch.  That entry point coupled with some kinda of dividend growth every year is good for any portfolio.
Even the past 5 years of dividend growth are remarkable.  The screen shows me 43.1 percent with the payout ratio all within reason.  This is about where I wish I could go on about how this is continuing and you better watch this guy closely.  Unfortunately the payout ratio is sitting around 77.7% (based on EPS of $1.03) and isn't likely to get better.  To manage the debt and cash flows it looks like the dividend has stopped growing. 
With that said it will most likely fall off of the U.S Dividend Champions list.  There was no increase in calandar year 2014 and the companies latest news for the fiscal year end just says it is reaffiming the $0.20 dividend.  I read that as no more increases for this year and be happy were not cutting it.

News
TESS gave this highlight which tells me they had to many eggs in one basket and are now paying for it;
"Continued our transition and restructuring initiatives to renew growth and profitability and reduce concentration on any one key customer or market"

Conclusion
Everything looked good  until we got to the yield section.  At this point it is looking too risky to initiate a position in this stock if you’re a dividend growth investor.  That plus it's short history of paying a dividend should be a warning sign.  Even though it came up as number one in my screen for May I will not be watching TESSCO unless they start raising the dividend again.

Your thoughts?

Thank you for reading,
The Dividend Family Guy


Full Disclosure: I do not own TESS

Comments

  1. Well, I was getting all excited at first as I though you made me discover a new stock to closely watch... but you're right. The last part makes it less attractive. Hope for them the restructuring plays a positive role.

    Cheers,

    Mike

    ReplyDelete
    Replies
    1. Yeah I was bummed to. Thanks for stopping by.
      DFG

      Delete
  2. Hi DFG,

    TESS is too small for me to really be interested in them as their market cap is 'only' $150M or so.

    I think an "earnings miss" can be a good opportunity at times as it's really just indicating the analysts expectations which are frequently wrong - 50% of analysts are below average by definition! :)

    But on a free cash flow basis, they seem to be generating a fair amount of cash against fairly low operating expenses - $17M income, $4M capital expenses leaving $13M to cover their $7M dividend payments. They spent a lot of cash on stock repurchases as well as the dividend.

    I'd tend to agree with you that it's not looking good for a sustainable dividend increase. I'd rather get a 4% yield from a company like VZ, T or CVX.

    Nice analysis though, thank you!

    Best wishes,
    -DL

    ReplyDelete

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