Value duo: Buffett and Graham style buys

GNC Holdings and United Stationers satisfy the investing criteria of the two legendary value investors.

By MoneyShow.com Oct 3, 2013 10:02AM
MoneyShow.comFile photo of Warren Buffett on May 6, 2013 (© Nati Harnik/AP Photo)By J. Royden Ward, Cabot Benjamin Graham Value Investor

We've found two stocks that meet the investing criteria of both Warren Buffett, and his mentor, Benjamin Graham. To find stocks meeting both the Buffett and Graham criteria, we looked for free cash flow of more than $20 million, net profit margin of more than 15 percent and return on equity of more than 15 percent.

In addition, in order to pass this screeb, the current price needed to be lower than Standard & Poor’s discounted cash flow value and the market capitalization needed to be more than $1 billion.

We also looked for a Value Line Financial Strength rating of B+ or better, positive earnings growth during the past five years with no deficits. Finally, we required that dividends are currently being paid.

GNC Holdings (GNC) is a specialty retailer of health and wellness items. These include vitamin, mineral and herbal supplements, and sports nutrition and diet products.

GNC has more than 8,300 locations, including 6,200 retail locations in the U.S. (958 franchise stores and 2,190 Rite Aid franchise store-within-a- store locations.) Franchise operations are situated in 55 countries.

GNC’s new Gold Card rewards program has been a huge success, although the introduction of the card was costly. The Gold Card provides members with significant savings and could help boost sales and earnings during the next several quarters.

GNC is expanding its store-within-a-store and e-commerce presence in China. Its expansion offers substantial opportunities for the company.

Sales increased 10 percent and EPS surged 23 percent during the last 12 months. I expect sales to increase 11 percent and EPS to climb 20 percent to 3.05 for the 12 months ending 6/30/14.

The 21.5 current P/E is somewhat high, but GNC’s growth is impressive. The company’s balance sheet is solid, the dividend yield is modest, and GNC’s shares are medium risk.

United Stationers (USTR) is a leading wholesale distributor of business products, with sales of $5 billion. The company stocks a broad range of 130,000 items.

USTR maintains 64 distribution centers that deliver products to 25,000 dealers. This network enables the company to ship most products overnight to more than 90% of the U.S. and to offer next-day delivery to major cities in Mexico and Canada.

Sales in the industrial supplies category, with sales up 31.5 percent, profited from the acquisition of OKI Supply in the fourth quarter of 2012. I expect sales to increase 5 percent and EPS to climb 9 percent during the next 12 months.

At 14.0 times current EPS and with shares selling well below Standard & Poor’s discounted cash flow value of 53.30, the stock price is undervalued.

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1Comment
Oct 3, 2013 10:24AM
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The only thing Legendary these days about Warren is his and others ability to cut sweet deals that regular folks can't have or negotiate. That's the dirty little secret behind his and others success these day. Corrupt Backdoor Deals between the FEDS, Government, Too Big to Fail Corporations, and folks like Warren and Bill Gross.
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