By Ryan Fuhrmann, CFA
Investment publication provider Value Line(NASDAQ:VALU) is currently trading right at its 52-week high. It’s up more than 15% over the past year, handily beating the market. Because of its strong run, now may not be the best time to place some chips on the table, but that could easily change, given the firm’s solid cash flow-generating capabilities.
Value Line provides detailed stock research via its flagship Value Line Investment Survey, along with related research on small- and mid-cap stocks. It also offers several services to help investors and companies track their investments. The publicly traded peer group in this space includes Standard & Poor’s, a division of McGraw-Hill(NYSE:MHP), and Morningstar. Value Line also serves as the investment advisor on 14 namesake mutual funds, and it’s also a registered investment advisor, providing services to private clients and institutions. Competitors in this regard include other money managers such as Legg Mason(NYSE:LM), Janus(NYSE:JNS), Franklin Resources(NYSE:BEN), and T. Rowe Price(NASDAQ:TROW)
Overall, Value Line has a dubious track record for growing either top-line sales or bottom-line earnings. Over the past five years, sales have slipped almost 3% per year, while earnings have fallen 0.5%. The company also garners little attention from Wall Street; I couldn’t find any analysts with active coverage on the stock.
Doesn’t sound too exciting so far, so what’s the appeal in Value Line, if any? For starters, it has one of the market’s more highly respected publications. In stark contrast to earnings trends, it also has a favorable track record for its highest-rated investments. As a result, its loyal customers are willing to pay $1,000 or more each year for a subscription.
Additionally, the company has low fixed costs and needs minimal capital expenditures to maintain the business. That means significant profitability — net margins average nearly 25% — which in turn generates significant cash flow.
Returns on invested capital have also been impressive, averaging more than 40% for the last two fiscal years — a major jump from fiscal 2004. In that year, Value Line decided to pay a gargantuan special dividend of $17.50 per share, as noted by fellow Fool Nate Parmelee. That payout of shareholder capital did nothing to impair the cash-generating abilities of the business, but created a smaller denominator in the return on capital equation, leading to subsequent major improvement in the figure.
Nate also reported that an entity named Arnold Bernhard & Co. owned more than 80% of Value Line. Arnold Bernhard founded Value Line back in 1931, after the stock market crash of 1929 left him unemployed as an analyst at Moody’s(NYSE:MCO). Value Line issued shares to the public in 1983, but the holding company Bernhard created left Value Line firmly under the family’s control.
As such, most common shareholders are at the mercy of the family’s decisions regarding allocations of Value Line’s prodigious cash flow. At nearly 20 times earnings, there are clearly enough investors interested in holding the shares and collecting an annual 2.2% dividend yield. Given its recent run, Value Line’s stock price is now a bit too rich for my blood. Any pullback closer to the 52-week low could prove an opportune time to jump on board and hope for another major dividend announcement. It may take patience, but the same strategy duly rewarded shareholders just a couple of years ago.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to e-mail him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.