Streetwise for Friday, October 27, 2017

The real driver of daily stock prices is not earnings, it is fear, hope and greed. Moreover, those three emotions can and often will counteract corporate fundamentals, product analysis, research and development programs, customer base, supplier relationships, and management expertise.

Unfortunately, there are those who attempt to capitalize on the concerns and emotions of others. I emphasize this point to once again highlight why investors need to have both a long-term view of the financial markets and to undertake their own research. That is what leads to intelligent, thought out, investment decisions that are free of emotional involvement.

Following up on the discussion last week of the attributes of companies with a market capitalization (shares outstanding multiplied by share price), many you asked for ideas in that direction, so here we go.

VSE Corporation (VSEC), established in 1959, has a market capitalization of about $628 million, which means it is in the small cap arena.

The company recently received the honor of ringing the closing bell at the Nasdaq Stock Exchange in celebration of its 35th anniversary of having a Nasdaq listing, which began on October 20, 1982.

During that period, the company has increased revenues from $51 million in 1982 to nearly $700 million in 2016, while increasing shareholder equity from $7 million in 1982, to over $255 million at the end of 2016.

VSE delivers a diversified listing of products and services that provide logistics solutions to federal and commercial clients for vehicle, ship, and aircraft sustainment, supply chain management, platform modernization, mission enhancement, and program management, and providing energy, IT, and consulting services.

VSE’s Quality Management System (QMS) was recommended for approval to the new International Organization for Standardization (ISO) 9001:2015 certification for Quality Management Systems.

Company revenues were $193.9 million in the second quarter of 2017, as compared to $160.5 million in the second quarter of 2016. For the first six months of 2017, revenues were $391.2 million, as compared to $304.1 million in 2016. These revenue increases were attributable primarily to the Federal Services Group and the Supply Chain Management Group.

Operating income was $15.0 million for the second quarter of 2017 compared to $11.9 million in the second quarter of 2016. For the first six months, operating income was $29.2 million in 2017 compared to $24.6 million in 2016. Much of the operating income increase resulted from the revenue increases in the Federal Services Group.

The company’s net income was $7.8 million for the second quarter of 2017, or $0.72 per share, as compared to $6.0 million, or $0.55 per share for the second quarter of 2016. Net income was $15.1 million for the first six months of 2017, or $1.39 per share, as compared to $12.5 million, or $1.16 per share a year ago.

VSE’s dividend yield is 0.47 percent and it pays out 8.89 percent of earnings as dividends. In comparison, the industry peer average dividend yield is 1.48 percent a payout level of 28.27 percent. VEC’s relatively lagging dividend performance could spur some dividend action going forward.

However, the company’s ending cash balance is less than the last full year dividend payment and cannot be relied on to cushion any significant reduction of cash flows in the future.

The source of the company’s cash to support the dividend paid over the last twelve months is operating cash flow (coverage of 19.70 times), investing cash flow (coverage is a negative 1.20 times), issuance cash flow (coverage is a negative 17.48 times) and twelve-month prior cash coverage is 0.26 times, for a total dividend coverage of 1.28 times cash flow.

The firm’s dividends are wholly paid from operating and investing cash flows, net of any debt repayments, which suggests a high dividend quality.

The intrinsic value of the shares using a free cash flow to the firm model is $147 as compared to a recent share price of $58.02.

Lauren Rudd is a financial writer and columnist. You can write to him at Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to