VSE Corporation: Still a Great Value

In a previous article, I took a look at the results of operations for the first quarter of 2007 which were recently reported by VSE Corporation (VSEC). Unfortunately, the press release did not contain a balance sheet or statement of cash flows. The company has now filed its form 10Q and so we can now take a more complete look at the quarterly results and at various aspects of valuation.

The balance sheet shows cash of 9.4M and no long-term debt as of March 31, 2007. Total stockholder’s equity stands at 41.7M. On the cash flow statement we see net cash provided by operating activities for 1Q 2007 of 1.1M and capex of 1.1M. Thus free cash flow for the first quarter is 0, up from (4.7M) in the year-ago quarter.

TTM revenue stands at 421.1M, an increase of 143.6M over the year-ago period. Since the average ratio of net PP&E to revenue over the last 5 years is .022, we can estimate TTM growth capex at 3.2M. Since TTM capex stands at 5.8M, we have maintenance capex of approximately 2.6M. This enables us to estimate TTM owner earnings [OE], defined as net income + D&A – maintenance capex, as 8.5M.

Here are some considerations which will give us some idea of the current valuation:

Market cap: 131.8M
Share price: 54.84
Enterprise value: 122.4M
EV/revenue: .29
Owner earnings: 8.5M
EV/OE: 14

Over the last 3 years, net income has been growing at an annualized rate of 57%. With just half that rate of growth, we have (EV/OE)/G = .5. If we assume an annual growth rate of 20% over the next 5 years and 3% annual growth after that, then using a discount rate of 11% we obtain a DCF fair value of 93.75. The current share price represents a 42% discount to this fair value. Reverse engineering the DCF calculation shows that the current price represents fair value under the assumption of 6% growth over the next 5 years, 3% terminal growth, and an 11% discount rate. The stock price has risen 20% on high volume since the earnings release on April 27. However, despite this rise, the above considerations show that the current price is very attractive.

On May 1 the company declared a 2-for-1 stock split effective June 28. This will result in 4.9M shares outstanding which should create a bit more trading liquidity than exists at present where the float stands currently at a paltry 1.4M shares.

Full disclosure: I maintain a long position in VSEC and added some more shares at the current price on Friday.

VSEC 1-yr chart