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Report example for MARTEK Bioscence (8Jan2010)

Technical Analysis (4/Jan/20010)

Daily Chart is building a side trending move on an important bottom of the stock It is enclosed in an area (rectangle) between two boundaries: below boundary is the supporting at 17.1 this boundary also strongly supported MATK during April; above boundary is a resistance at 21.0 : tested and penetraded in recent summer with relatively low volumes. I am not concerning in to potential figures, almost at a very short ; even if, to say the true, I can't exclude a closing for the last gap (12/14) or the arising cup that I keep on the chart.

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MATK Stock Evaluation

There has been almost no net change in share price and also earnings estimates have not been amended or restated in last week. I will continue to track closely the current ratios and metrics for MATK and evaluate them against historical averages and comparable peer analysis. This framework will give me the tools necessary to understand when a downgrade from my Greatly Undervalued rating will be most timely.

Summary

This company ideal drives us to keep our stock analysis as simple as possible, but of course, no simpler than is necessary. It is in that vein that I focus much of my analysis on fundamental factors, peer analysis, and valuations versus historically normal ranges. However, I also apply standard deviation and volatility studies in order to understand more completely the risks associated with each market environment. When a sector is as hot as the Healthcare sector is right now, I am certainly a little bit more cautious . As this NASDAQ has continued to make gains in the recent weeks and months, I have become more bearish on the whole. However, as of this report I am satisfied to simply affirm my Greatly Undervalued rating. Please continue reading this report for a full explanation of my reasoning. First, MATK increased in price by 0.11% since 12/26/2009 and this does not greatly impact my outlook. Second there have been no significant adjustments in earnings expectations or guidance for MAKT.

MATK Revenue

Cash earnings is the most important factor in my analysis, but it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic I look very closely at revenue numbers as my second most important factor in valuing a company's stock. I have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, MATK the high and low end of the Price to Sales per share ratios are 8.50x and 3.92x respectively. Notice that MATK's current Price to Sales per share ratio is 1.83x, which is quite a bit below what I consider a normal Price to Sales ratio for this stock. Given normal conditions and a price of $18.95, MATK is 71% below where I would expect to see it. This will beneficially factor into my final analysis of MATK as it is not often that this stock sinks to these levels.

MATK Cash Earnings

MATK is significantly below its historical average multiple of Cash Earnings. Looking at the last 8 years we can get a good understanding of what investors have grown to expect from MATK. For example, MATK's Cash Earnings ratio per share has fluctuated between 17.61 and 35.97 over this historical timeframe. So with MATK's current price (latest close of $18.95) and most recent level of Cash Earnings reported, I see significant opportunity from a value perspective. At its current price level, MATK is 66% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn't exist in a vacuum. So if the market doesn't recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with MATK.

MATK Dividends

A strong dividend payment history is looked upon as a favorable characteristic on a company’s future and potentially can receive a positive rating. That being said, I don't require dividend payments for company's whose management has elected to forgo them entirely. MATK may pay a dividend at this time; however, there is an insufficient amount of history to incorporate it into my analysis. Therefore, I am not utilizing the dividends in my study.

Evaluating Management

In evaluating management, I focus on three key measures, which combined, produce Return on Equity (ROE). These measures are the investing of company assets, the use of leverage, and the day to day operation of the business. Below I summarize where each of these measures are currently compared to their average levels over the last five years. This gives a good indication of the strengths and weaknesses of each area.

Asset Turnover Ratio

The first portion of management's evaluation will examine whether management is efficiently investing company assets. For this study, I look at MATK's Asset Turnover Ratio (ATO) which is calculated by dividing sales by assets. At a current rate of 0.55x as of last reporting, this measure of management's investing ability is significantly above its 5 year average by 16%.

Leverage

The next stage in my evaluation of management is to look at their financing activities. By understanding their financing activities I can show whether management is being effective in their use of leverage. The best demonstration of this is the Assets to Equity Ratio. As of MATK's most recent reporting, Assets to Equity Ratio was 1.10x which is below its historical average over the last five years by 6%. To the extent that ROE is not significantly diminished, reduced leverage can be seen as an improvement in shareholder safety.

Profit Margin

Lastly, we factor in profit margin trends into my analysis, for MATK profit margins are currently significantly above its 5 year average. Profit Margin (MGN) has long enjoyed popularity as a measure of management efficacy. It is computed by dividing earnings by sales, and as of MATK last reporting, Profit Margin was 10.69% significantly above it’s historical average over the last five years by 23%.

Notes for Management

While each of these metrics provides part of the story, none of them by themselves gives the complete story. For that I use a combination of all three (i.e. ROE) as the best overall indicator of management effectiveness for MATK. It is common for firms to generate an after-tax ROE of somewhere between 10% and 20% with an average of 15% per year. In the case of MATK, at its last reporting, the ROE of 6.40% was poor in comparison to the averages.