This is a summary of this week’s show.  Listen in at  Value Line Observer – January 22 2010
Note:  This Blog is for Entertainment Purposes Only and should not be relied on.  See all our disclosures at www.thevalueguys.com.

Val’s Three Best Ideas This Week:

Chemed Corp (CHE)

I rambled on a little bit about this one on the show, so you are definitely saving time by reading this. I’m attracted to the valuation at 14x earnings and 7x EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). But it’s not just that. The company has two businesses: Roto-Rooter, which is, according to Value Line, the largest plumbing company in the U.S, and VITAS Healthcare, a hospice business. What I like about this is that as among the largest competitors in stable commodity markets, these companies should be able to keep their competitive edge by simply maintaining it’s share of mind with consumers. They will have economies of scale in advertising because of size, will be in a position to do accretive acquisitions with private competitors, and are unlikely to be out flanked by new technology or a new entrant. So, at 7x EBITDA, you have a 14% (1/7) earnings yield plus growth, which Value Line estimates at 9%, but I only need 5% to make it a buy in my book.

Valmont Industries (VMI)

I’ve watched this company for over 25 years, and i’m actually surprised it hasn’t been bought out. It’s a leading provider in the agriculture irrigation business, and it has leveraged that manufacturing skill into a pole business for the electric grid, cell phone tower business, lighting and traffic, and maybe even the plain old telephone pole business, although i’m not sure about that last one. I’m attracted initially to the low valuation, at 8x EBITDA and a 20% discount to the market P/E, it deserves a second look. They have been improving return on capital for several years, which means something incremental is going on that’s generating outstanding marginal returns on capital. The return on equity has moved over 20%,

and while the stock is off the lows, it seems cheap for a best of class provider in a core world market, with clear advantages in several growth markets. The balance sheet is in great shape, and insider ownership is meaningful. Not a great dividend yield, but at least lately, management has had a good use for the money.

Hillenbrand (HI)

This is the casket business, which was formed as spin out from the old Hillenbrand, which also owned a hospital bed business, Hill Rom. For some reason, Value Line doesn’t even rate this, maybe because it’s less than 2 years old, although the former Hillenbrand was a public company for many years. What I’m attracted to is, like the Chemed story, a stable, low risk, business, that offers an earnings yield significantly above bonds of like risk. Hillenbrand trades at an enterprise value of $1.2 billion, the price we’d have to pay to own all the stock and debt, less the cash. We can look at the ebitda divided by the enterprise value as a yield I often refer to as cash on cash yield – the cash we get divided by the cash we pay – and we can reasonably compare this to a bond yield of like risk as a benchmark for relative valuation. In the case of Hillenbrand, with $200 million in ebitda, I have a 16.6% cash on cash yield plus, admittedly, tiny growth. Not only is the death rate even lower than population growth, but you have cremations taking share from caskets, so it’s not great. But with a 16.6% cash on cash yield, I don’t need a lot of growth to be attractive, and this seems pretty low risk. With a strong brand and economies of scale in manufacturing and distribution – not to mention their state of the art training center for funeral home directors – in an industry that is pretty much unchanged for a thousand years, unseating their leadership position would be a daunting task.