FONAR Corporation (NASD:FONR); My Fair Value Estimate:
Updated: Dec 13, 2022
o My Estimate of Fair Value (MFV)
o Return on Invested Capital (ROIC)
o Operating Earnings (OI)
o Price-to-earnings Ratio (PE)
o Liquidation Value = Tangible Book Value (TBV)
o Book Value (BV)
FONAR Corporation is engaged in the upright MRI machine business. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before we get to those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be a winner. Correspondingly, pros and cons as I see them.
·The % of shares short is <5%
o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some research before betting against a company
·The company’s float is between 4 and 12mm shares
o This range provides enough liquidity for my purposes, but is small enough that the stock might experience a parabolic move upward on significant buying interest
· The company does not have options, forcing those who want long exposure to buy shares
· Insiders have bought shares not too far from current prices in the last 3 months
· Shares trade above the 200-day simple moving average
o This shouldn’t matter, but enough people think it does that I give it a little weight…
·The company is also cheap using OI/EV (~.18), my preferred relative measure
·The company has a tough year-over-year comparison in the upcoming quarter
·Operating Profit Margins are down sequentially and year-over-year
Those pros and cons and—more importantly—the company’s average ROIC (~22% over the last 10-years) make it seem likely that the company has durable competitive advantages. So, I deem the company good quantitatively. I am willing to assume—speculate—that durable competitive advantages will allow the company to grow earnings over time and therefore I value the company relative to $30mm OI, my estimate of what the company can reasonably earn over an average year. Given the company’s seemingly excellent balance sheet and 5-yr average multiple of PE x 10.6**, I think OI x 10 is a reasonable fair value, which equates to MFV of $29.94.
At a recent price of $17.75, the differential between market value and MFV is -41%.
Conclusion: I own shares. FONR not only has strong historical ROIC, but it has grown TBV meaningfully. Thus, I plan to own shares for the long-term to benefit from compounding. I will likely maintain a base position and be a net buyer when the stock trades significantly below MFV and net seller when it trades above. If ROIC deteriorates (which it has been recently) to the point where I no longer think it likely the company has durable competitive advantages, or if TBV growth slows, I may sell.
My positioning: Long shares.
For more information about how and why I designate companies good read here: (https://www.veriteventures.com/post/how-i-value-good-companies)
*Post prepared using data as of 12/12
**I’m using the company’s historical PE multiple as a proxy for OI because PE multiples are more readily available from data providers and because I will never pay more than the lessor of 1) OI x 10, 2) OI x the company’s own historical multiple, or 3) the S&P 500’s current OI multiple, which lessens the risk of over overestimating the company’s historical multiple via the PE to OI conversion.
The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.