Filed Under:
Tickers in this Article: ALOG, IDCC, GRS, GE, LLL
There's value in Analogic. At least, that's what Bill Nasgovitz, manager of the Heartland Value Fund thinks. It's his fund's third-biggest holding, representing 3% of the total net assets. Only InterDigital (Nasdaq:IDCC) and Gammon Gold (NYSE:GRS) account for more. Analogic (Nasdaq:ALOG) stock currently sits around the $39 mark, less than 10% off its 52-week high. What is it that has this Lipper award-winning fund manager holding 11.8% of the security and medical imaging company's stock? IN PICTURES: World's Greatest Investors

Analysts Don't Seem to Like it
On January 14, 2010, investment bank Dougherty & Company upgraded Analogic stock from sell to neutral. And back in December, Needham lowered its opinion from buy to hold. These aren't exactly ringing endorsements to buy the stock. There must be something that this savvy value investor sees that others don't. Perhaps its the fact America is going crazy over airport security, and any technology company operating in a related field is bound to catch some magic in a bottle.

Principled Investing
Heartland Funds adhere to 10 principles of value investing, and some of them are at play here. For instance, number one on its list is the presence of a catalyst - something that will drive the price of a stock closer to its true value. In the case of Analogic, think 3D imaging. Two of the largest companies in explosive detection are France's Safran and Britain's Smiths Group. Safran, thanks to its 2009 acquisition of General Electric's (NYSE:GE) Homeland Protection unit for $580 million, has a portable explosives detection device called the MorphoDetection Itemiser DX, which uses medical imaging to detect explosive residue. Smiths Group products still use x-ray imaging, which isn't as precise. In order to catch up with 3D imaging products from Safran and L-3 Communications (NYSE:LLL), the British company called upon Analogic to develop its own device. A deal was signed in December. Smiths Group is currently the world's largest explosive detection company.

Low Valuation
The next three principles Heartland uses in its evaluation of a stock are low price-to-earnings, price-to-cash flow and price-to-book value. On the surface, none of the three appear very cheap. However, if you look back on its 10-year history, today's seemingly expensive valuation is fair, if not downright reasonable. Historically, its average P/E is 53, its P/B 1.7 and its P/CF 19.1. Currently, its P/B is 1.3, its P/CF is 16.3 and its forward P/E is 24.3. Each less than historical norm. At face value, there's an argument to be made.

Financial Soundness
Then, there's long-term debt and the general state of its balance sheet. First, it has no debt. Second, it has $12.45 a share in cash. And third, its stock is trading at just two-times both net net working capital and net current assets. Add to this a first-quarter operating profit of $4,000 in comparison to a loss of $1.6 million in the same quarter a year ago, and it looks like Heartland's definitely on to something.

The Bottom Line
Many investors like the way Heartland invests, especially the part about its value fund's 11.9% annualized rate of return since 1984. If the company put this much money on the line, there's definitely value in Analogic. (Learn more about value investing, read: Stock-Picking Strategies: Value Investing and 5 Must-Have Metrics For Value Investors )

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center