Boise Cascade may fit the requirement of a company with better valuations

Tuesday, June 17th, 2014

I’m getting more questions from people wondering whether we are going to have a correction.

The answer is always “yes”-- I just don’t know when and don’t let anyone tell you they know when. It’s like trying to predict the weather more than a week out; if the forecasters are right they will say they knew it, but if they were wrong they will tell you all the reasons why they were wrong and why it wasn’t their fault.

An investor should not worry about corrections, anyway; they are short in duration and I will never forget what famed investor Peter Lynch said: “Far more money has been lost by investors preparing for corrections, or trying to anticipate correctionsthan has beenlost in corrections themselves.”

It really comes back to valuations. We just sold a large position of a company I began buying five years ago and probably stopped buying three years ago when the valuations no longer made sense. We sold this company June 9, when the forward PE hit 16.5 times forward earnings and the current PE was approaching 21 times earnings.

While I hated to part with this company -- and I also knew that some of my investors would pay capital gains on their 100 to 200 percent gain depending on when they got into it -- I knew it was no longer the bargain it was when I first began buying shares of it. While I really hated to see this company go because I enjoyed reading the quarterly reports and watch the investment grow, the valuations were overpriced. And although the stock may go higher, I knew my risk had increased and that it was time to look for a company with better valuations just like I saw in this one five years ago.

One company that fit that requirement is Boise Cascade Co. (NYSE: BCC)

This company has a market cap of $1.1 billion, a 52-week low of $22.55 and a high of $31.86. The stock currently trades in the middle of that range, about $27 per share. What I like about this company besides the fundamentals is that it supplies wood to the building industry. You may have heard about the shortage of places to live because the building industry has not kept pace with the population growth. I believe that over the next few years, more building will need to be completed to accommodate people looking for a place to live.

And what is the primary product used in building homes and apartments? Give up? It’s wood. And that is what Boise Cascade Co. provides. The company is also ramping up production and buying new factories to handle the increase in demand.

Some of the important highlights of the company fundamentals would include a price to sales of only 0.34 when the industry trades at 1.19 times sales. Another very good valuation was the price to tangible book trading at 2.64 for the company -- well below the industry average of 8.7.

Sales have climbed by 12.2 percent year over year, beating the industry average of 9.6 percent. An unknowing investor would be scared off by the decline of 71 percent year over year on the earnings per share when the industry experienced a positive increase. What the experienced investor would do is look at the income statement and see that for the previous 12 months, the company received tax credits that increased the earnings and the earnings per share. These earnings are not from operations and aren’t there this year, so while it appears the earnings are dropping, that is not the case because last year’s earnings included a one-time event that was not from operations.

The company’s debt to equity looks good at 65.7 compared with the industry average of 73.9. Also looking good is the receivable turnover at 16.3 -- double the industry at 7.7. Inventory turnover also favors the company at 7.11 verses 6.21.

Looking out to December 2015, the mean of five analysts are looking for earnings per share of $2.32. I would like to see a tighter range on the estimates with the high estimate being $2.80 and the low coming in at $1.70; but even using the lowest estimate the target sell price is $28 per share, and I’m pretty confident the company can do better than that. Using the mean estimate of the five analysts of $2.32 and the 16.5 forward PE multiple, a target sell price of $38.28 would deliver a potential gain of 42 percent over the next 18 months. Don’t know about you, but if that happens I would be very happy.

Do you have a question or a company you'd like me to take a look at? Email me at!

Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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