Schiff Nutrition Intl (WNI) is my Stock Pick of the Week as well as one of October’s Most Attractive Stocks – Small Cap Special.
Like all of our Most Attractive Stocks the company has (1) high and rising economic profits (as distinct from accounting profits) and (2) a cheap valuation. As shown in our report on WNI, the company’s ROIC (17.1%) is in the Top Quintile of all the companies we cover and its economic earnings are growing. At the same time, the stock’s valuation implies that WNI’s profits will decline by 25% and never grow again. In other words, the stock market is predicting a permanent decline of 25% in WNI’s profits. The market is setting the profit growth bar quite low for this stock.
HIDDEN GEMS:
- Our discounted cash flow analysis shows that WNI’s current valuation (stock price of $7.89) implies that the company’s profits will decline by 25% and never grow again.
- The company grew its economic earnings more than its reported earnings. Economic earnings rose by $9.1mm (506% increase) while Net Income rose by only $8.1mm (79% increase) during its last fiscal year.
- The company has $42mm in Excess Cash, which we remove from our Invested Capital calculation. $42 million is 20% of WNI’s market cap.
For details on what causes the difference between Economic Versus Accounting Profits, see Appendix 3 on page 10 of our report on WNI. See Appendix 4 to learn how WNI increased NOPAT by cutting costs and increased its NOPAT Margin from 5.2% to 9.3%. See Appendix 5 for details on how WNI grew Invested Capital slower than revenue and drove Invested Capital Turns higher. Appendix 7 (in the Return on Invested Capital section) shows how the company improved NOPAT Margin and rising Invested Capital Turns result in an increase in ROIC (from 8.7%% to 17.1%) and Economic Profit, which rose by $506% while Net Income rose by only 79%.
As per Investment Strategy 101 and How to make money picking stocks, WNI fits the Risk/Reward profile of a great stock to buy.
**See Finance 101 and Economic Versus Accounting Profits for more detail on why accounting profits are not reliable indicators of corporate profitability or value creation.