Chase Corporation: A Company with Consistently Strong Results

Looking through the list of top % gainers on the AMEX last Wednesday, I saw that Chase (CCF) had just made the list, closing at $19.00, up $.96 or 5.32% on the day. I do not own any shares or options on this stock but my Stock Club does own some shares.

This entry is called a "revisit" because I have reviewed Chase previously. On February 6, 2007, I examined this stock and found it worth of inclusion on this blog. At that time the stock was trading at a split-adjusted price of $33.49/2 = $16.75. With the $19 close, this represents a gain of $2.25 or 13.4% since posting.

I still like this stock and thus, Chase Corporation is rated a buy.

I would like to briefly review some of the facts surrounding this company that have led me to this assessment and re-emphasize the philosophy behind my thinking.

According to the Yahoo "Profile" on Chase, the company

...engages in the manufacture of specialty tapes, laminates, sealants, and coatings, as well as in the provision of electronic manufacturing services worldwide. It operates through two segments, Specialized Manufacturing and Electronic Manufacturing Services.

Chase, on April 8, 2008, announced 2nd quarter 2008 results. For the quarter ended February 29, 2008, revenues came in at $28.2 million, a 3% increase from the $27.5 million reported in the year earlier same period. Net income worked out to $1.87 million, up 36% from the $1.37 million reported last year or $.22/share, up from $.16/share the prior year.

While I might prefer to see a stronger revenue increase, I am satisfied that revenue did grow and that earnings were able to increase even more. One of the cornerstones of my investment 'picks' and my general philosophy is that the consistent results of a growing company producing ever-improved financial results will result in a stock that also consistently appreciates in price over time.

But one quarter of good results is not enough to sell me on a stock. It is the consistent reporting of results--which I can identify utilizing Morningstar.com. Indeed, if we check the Morningstar.com "5-Yr Restated" financials, we can see several things that I like about the company. First of all there has been a steady increase in revenue (although the company is certainly quite small), from $74.6 million in 2003 to $127.5 million in 2007 and $132 million in the trailing twelve months [TTM].

Earnings, after a dip from $.63/share in 2003 to $.58/share in 2004, have steadily increased to $1.22 million in 2007 and $1.37/share in the TTM.

Another interesting observation is that this small company even pays a dividend, which has been fairly regularly increasing from $.14/share in 2003 to $.20/share in 2007 and $.25/share in the TTM. I do not require dividends to 'endorse' a stock--but it certainly is an added 'plus' for me! To also have a company that regularly increases its dividend is a corporate action that suggests a certain confidence in the company's prospects and financial strength.

If we examine the outstanding shares, we can also see that Chase has been quite conservative with issuing shares. In fact, 8 million shares are reported in 2003 and four years later, the company still reports only 8 million shares. In contrast, you can view the Morningstar.com "5-Yr Financials" on Sirius (SIRI), not a favorite of mine, that has increased its shares from 827 million in 2003 to 1.47 billion in the trailing twelve months.

I do not know if CCF will be a better investment that SIRI tomorrow, next week, or next year. I am just using this example to explain my attempt to identify what I call a 'quality' investment, that for me includes a certain reluctance on the part of management to issue an excessive amount of new shares.

Insofar as 'free cash flow' is concerned, I want to see creation of 'free cash' instead of a cash burn rate that was so common during the dot com bubble. Chase generated $3 million in cash flow in 2005, increased it to $9 million in 2006, $11 million in 2007 and $12 million in the TTM. Perfect.

And then there's the balance sheet. Again, I am not a genius, but at least on these tables I want to see more assets than liabilities (sort of like having more cash in the bank than bills to pay). Don't we all want that sort of balance sheet?

Chase is reported by Morningstar to have $1 million in cash and $37 million in other current assets. This total of $38 million in current assets (things that can be easily converted into cash within the next 12 months), easily covers both the $16.1 million in current liabilities (with a current ratio of 2.375---a healthy ratio from my perspective) and the $10.9 million in long-term liabilities combined.

In terms of valuation, I am also always looking for a 'good deal'! That doesn't mean I am a value investor, but that value plays an important part in any investment decision. In fact, I would describe my own philosophy as eclectic, that is utilizing all of the information I can find to make that decision.

An easy place to find valuation numbers on stocks is right at Yahoo Finance. If we review the "Key Statistics" on Chase from Yahoo, we can see that first of all this is a very small capitalization stock with a market cap of $157.95 million.

The most common ratio used by value investors is traditionally the p/e ratio. In this particular case, Chase is what I would call 'dirt cheap' with a p/e of 13.92. The forward p/e (based on estimated earnings for the fye 31-Aug-09) is even better at 11.88. Since there aren't any analysts willing to estimate 5-yr results, we don't have a PEG with is the ratio comparing the p/e to the 5-yr growth rate anticipated.

I have been looking at a few other 'value' numbers, including the Price/Sales ratio. Back in 2005 Paul Sturm from Smart Money wrote a great article on the utility of the Price/Sales ratio in comparing one company to another.

Like so many other numbers, this one is relatively useless in isolation. That is, the value of this ratio is in its relation to other companies in the same industry. The relative valuation of a stock can be evaluated by comparing 'apples to apples'. Thus, checking the Fidelity.com eresearch website, we can see that Chase has a Price/Sales ratio [TTM] of 1.13, compared to the industry average value of 7.49.

In terms of profitability, examining the Return on Equity [TTM], we find that Chase comes up a bit 'light' with a ROE [TTM] of 20.84% compared to the industry average of 31.29%. So in this particular number, we find a little less of an impressive result.

Returning to Yahoo, there are 8.31 million shares outstanding (a small company!) with 5.96 million that float. That being said, there is a significant number of shares out short, which for me means a current ratio greater than 3 days. Yahoo reports 75,080 shares out short as of 4/25/08, representing 4.5 trading days of volume.

Regarding the dividend, the company pays a forward annual dividend of $.25/share yielding 1.3%. The last stock split was a 2:1 split back on June 28, 2007.

I am not much of a technical analyst. I don't talk much about moving averages. But with point and figure charting, I do take a look at 'support' and 'resistance' lines.

If we review the 'point & figure' chart on Chase from StockCharts.com, we can see that the stock has indeed shown some weakness dipping from $29 in January, 2008, to a low of $16.50 in March, 2008. Since that time it has been 'fighting-back' so-to-speak, but frankly, I would like to see this stock get above $24 before starting to call the 'all clear.'

In summary, I still like Chase. I am not prepared to buy any shares but shall keep it on my own 'watch list' which isn't really a list at all, but the accumulated names of stocks I write about here on this blog.