Value Line, Inc. (NASDAQ: VALUE) has tons of cash on the balance sheet to hire more professionals as well as develop more investment tools. Additionally, if fund managers inside the VALU trust continue to deliver strong numbers, earnings of their investment advisory business could warrant further appreciation in the share price. Finally, in a scenario where the company enters the cryptocurrency asset management business, Value Line could even be worth $122 per share. With that, the downside risk doesn’t seem low, so I think this is a business for investors who really understand VALU’s business model.
Most investors are familiar with Value Line because it publishes stock reports. With that, in my view, the most valuable business model held by Value Line is its investment interests in Value Line Funds, which management has valued at less than $70 million. I believe it is worth much more.
In the latest annual report, the company reported up to $4 billion in assets under management. Value Line receives a portion of the revenue generated by EAM, the company’s asset management arm.
Value Line also holds a non-voting stake in EAM under which it is entitled to receive a portion of the business’ non-distribution revenue ranging from 41% to non-distribution revenue levels of $9 million. or less to 55% at revenue levels of $35 million or more. Source: 10-K
In order to assess the valuation of Value Line, we need to consider how the company receives money from the asset management business. Profits from holdings in the EAM trust are between $16 million and $19 million per year. However, they are not included in operating profit because Value Line does not fully consolidate:
According to the previous reasoning, many investment advisers report a somewhat misleading EBITDA. Keep in mind that net income for the year 2021 was higher than 2021 EBITDA due to the company’s interests in the asset management company. In 2021, net income was more than 150% higher than 2021 EBITDA:
We can’t really use the EV/EBITDA ratio because the EBITDA seems quite low. Therefore, I decided to run a business model of each company to understand the fair price of the company.
If Value Line hires more equity researchers and more software developers, the implied fair price may be $58 per share.
In my opinion, if Value Line Publishing increases the number of newsletters and the number of stocks covered, the company will likely grow its revenue line at a faster rate. Currently, the company covers stocks, mutual funds, ETFs and options. In this scenario, I will assume that management decides to also cover real estate and international stocks from Europe, Latin America and Asia:
Investment periodicals and related publications offered by Value Line Publishing LLC, a wholly owned entity of the Company, cover a wide range of investments, including stocks, mutual funds, ETFs and options. The Company’s periodicals and related publications and services are marketed to individual and professional investors, as well as to institutions such as public and university libraries and investment companies. Source: 10-K
I expect the company to invest more money to hire new equity researchers. I also expect Value Line to successfully recruit and train software developers. As a result, management can successfully come up with a richer database with artificial intelligence tools and better financial projections.
The investment analysis software (The Value Line Investment Analyzer) includes tools for sorting and filtering data. In addition, for institutional and professional subscribers, VLP offers current and historical financial databases (DataFile, Estimates & Projections, and Mutual Funds) via the Internet. Source: 10-K
In my opinion, new software developers will likely help Value Line deliver better quantitative strategy portfolios. Therefore, if returns increase, more customers will likely buy Value Line’s newsletters, and revenue will most likely be headed north:
Value Line quantitative strategy portfolios are developed based on our renowned proprietary ranking systems for TimelinessTM, Performance and SafetyTM, Financial Strength Ratings and a comprehensive database of fundamental research and analysis. All of these quantitative investment products have a solid theoretical basis and have demonstrated superior empirical results. These strategies are available for licensing by finance professionals such as RIAs and portfolio managers. Source: 10-K
Considering the increase in 2020 and 2021, I tried to be a little optimistic with the growth in sales. I assumed 10% sales growth from 2022 to 2026 and an EBITDA margin of 15%, which is higher than 2019, 2020 and 2021. My results include free cash flow flow of nearly $5 to $7.5 million from 2022 to 2026. I also used an exit multiple of 11.5x, which is approximately the median that SA pays for the industry. Finally, with a weighted average cost of capital of 1.5%, the valuation of the publishing business model should be $180 million.
Now, the valuation of interests in the EAM trust included a profit stream of between $16.3 million and $28 million. Also, with a weighted average cost of capital of 1.5%, I got a valuation of $366 million. If we add the two companies together and divide by the number of shares, the implied price would be $58 per share.
If the value line decides to enter the global Crypto Asset Management Market, I believe the total valuation might be closer to $122
With Value Line reporting research on Bitcoin, in my opinion, we cannot discount the fact that management is entering the growing industry of crypto asset management. Note that investors expect this market to grow at a CAGR of approximately 24.6% from 2021 to 2028:
Latest research shows that the demand for the global Crypto Asset Management market size and share was valued at around USD 0.52 billion in 2020 and is expected to reach around USD 2.4 billion by the end of 2028, with a compound annual growth rate of around 24.6% during the forecast period 2021-2028. Source : Global Crypto Asset Management Market Size
In this scenario, I assumed a sales growth of 24.6% from 2022 to 2026 and an EBITDA margin of 35%, which is lower than the margin reported by other players in the industry. cryptography:
Results include free cash flow of nearly $18.5 million in 2022, $25 million in 2024 and $35 million in 2026. Additionally, with a conservative exit multiple of 15x EBITDA for the In the crypto industry, the valuation of the publishing business and asset management entity could be $122 per share.
If the company doesn’t buy other publishing business, hire enough qualified professionals, and the trust doesn’t get more clients, I’m looking at a fair price of $47
In my opinion, the worst that can happen to Value Line is the lack of qualified professionals. In this case, I expect Value Line to have issues with hiring good writers and value executives. As a result, the business might not make the right decisions, which would lead to lower Value Line revenue growth:
The Company’s future success depends on its ability to retain and recruit qualified professionals and executives. The Company’s executive corporate officers do not have an employment contract with the Company and the Company does not maintain “key person” insurance policies on any of its executive corporate officers. The loss of the services of key personnel could have an adverse effect on the Company. Source: 10-K
Besides, I also expect Value Line’s investment arm to not get big profits as fund managers might not be able to predict new market moves. As a result, the valuation of the trust will not be so large, which would reduce the total valuation of Value Line.
A decrease in income generated by EAM’s investment management business, whether as a result of performance, competition, regulation or other reasons, would reduce the amount of cash flow received by the Company of EAM, as this reduction could have an adverse effect on the Company’s cash flows and financial position. . Source: 10-K
In this scenario, I used a conservative sales growth of 2%, an EBITDA margin of 12% and an exit multiple of 10.3x. The results include an implied stock price of $47.
Balance sheet: available cash, which management also uses to organize a share buyback program
With $29 million in cash and $27 million in equity securitiesI think Value Line has enough cash to hire new staff and design new investment tools.
Interestingly, Value Line uses its cash to buy its own shares, which may explain the recent rise in the share price. If Value Line continues to buy its own shares, I don’t see why the demand for shares would decrease:
On March 14, 2022, the Board of Directors approved the renewal of the share repurchase program, with immediate effect, allowing the repurchase of shares from time to time, up to an aggregate amount of 2,000,000 $. The new buyback program, which replaces the July 2021 program, has no fixed price limit or expiration date. Source: Press release
Finally, with an asset/liability ratio greater than 2x and with little debt, the company will probably be able to obtain financing from banks if necessary.
Given the current share price and the share buyback program, I will be watching the stock very closely. If management continues to hire employees and come up with new newsletters and more software tools, the publishing business could be more valuable in the future. Also, if the fund managers running the investment business continue to deliver good numbers, the business could grow even more than the market because fees will be higher. Finally, if Value Line decides to enter the cryptocurrency asset management industry, I would expect a significant increase in the share price. There are obviously risks, and the downside risk is not low, so I think the stock is not for all investors.