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No. of Recommendations: 3
Onyx Acceptance Corporation
Nasdaq - ONYX

Onyx is not just a value play - it is also a growth play. This is a very rare occurrence in the market, especially for a company traded on the Nasdaq. I might expect to see this sort of thing with a BB stock. Here are the numbers and my analysis. At the end, I turn into a prognosticator and give 5 year targets for this stock.

Year / Revenue Growth / Earnings Growth
1996 vs. 1997 / 40.5% / -290%
1997 vs. 1998 / 73.6% / 138%
1998 vs. 1999 / 48% ??? / 59% ???
(I estimated 1999 Q4 results based on previous 3 quarters)
To me, the revenue growth trend is more important than the earnings growth at this point in the company's development. But the earnings growth ain't too shabby.

Price/Sales: 0.42 - EXCELLENT!
Price/Earnings: 4.46 - UNBELIEVABLE!

Book Value: $8.21 per share
Recent Price: about $6.00 per share
Note that Price/Book is less than 1 - for a company that leases its space! The Thesaurus says "Incredible!"

Debt/Equity: 5.03 - but this number is misleading. Most of the debt (like 4/5 of it) is "warehouse borrowings." It is real debt, but it is debt that the company incurs to sell to someone (customers) at a higher price. Warehouse borrowings play a big role in the success of the company, so the Debt/Equity ratio doesn't really mean anything unless you refigure it discounting the warehouse borrowings. You have to look at the balance sheets to find this out, but it is all there in black and white.

There are lots of other numbers, if you care to look, but these are the big ones in my opinion. I can't find any that look bad other than Debt/Equity, and I already said why that number is misleading.

The one analyst who follows this company figures it will grow at a 25% rate for the next 5 years. Looking just at the revenue growth, my personal opinion is that it could grow at better than 30% for the next 5 years, and 35% for the next 3. Maybe better.

Looking at the price chart, you would think this company was losing 200 million dollars a year (no, that's Amazon - sorry). This company has made money for the past 3 years, it is growing exponentially at a rate that would shame several popular tech stocks I know of, and although it is small now, it will be big in a few years if it keeps up only half its past growth rate. What's more, its revenue growth is AMAZINGLY consistent. It has not had one quarter of negative revenue growth since 1996. That's pretty darn impressive!

The company has already shown it can expand and grow into new markets. The number of employees it has has increased, roughly, in proportion to its revenue growth.

So what is wrong with this company? Why is the stock price so low within the market and within the industry when this company is clearly outperforming everything around it? Well, for starters, the company is not actively marketing itself to investors, and it's only followed by one analyst. If you don't read the 10-Ks, 10-Qs, and other "official" reports, you would hardly know anything about the company. We are lucky to get one press release per month. There is a web site, however, and the company is more than happy to send you an investor relations package if you ask for it.

REALITY CHECK - What does "value" really mean???

5 year target - $90 ($24 to $144 range)

So what is going to happen with the stock price? As a chartist, I would say that it continues to bounce off $6. $6 is already so ridiculously low that people are simply not willing to sell below that for long. That's getting to a P/E of about 4. I think the reality of the situation is that the stock price isn't the real "bottom" here - it's PEG ratio. P/E of 4 versus growth of 30% gives you a ridiculously low peg of 0.13. We are getting close to a PEG of 0.10. You will not find a PEG that even approaches this in any tech sector right now. The silliest part of all is that there is not one good reason why the PEG should be this low. However, it seems to be keeping the stock price in a fairly narrow range between $6 and $7. The stock has bottomed out for the time being (of course, I could be wrong about that). Anyway, everyone who owns this stock believes it is ridiculously undervalued, including me.

So lets say the stock keeps bouncing off of P/E = 4. If it grows its earnings at 30% for the next 5 years, the stock will sell at 4 times its current price. That's $24, folks. That's a respectable gain! $10,000 turns into $40,000 in 5 years.

If the price is $6 in 5 years, that means the P/E of the stock will be 1! Do you really think that a company that is growing its earnings AND revenues at 25% to 35% will sell at a P/E of 1 for long?

More likely, here is what will happen. At some point, the stock has to go up again. Maybe on the next earnings report, certainly within a few quarters. When it does, people will begin to notice it. Momentum players will notice it too, and the days of thin trading will be behind us. If the stock were fairly valued, with a P/E of about 25, your investment would be worth 5 to 6 times its current value. Couple that with the natural growth of the earnings (lets say 25%, for a 5 year multiple of 3). What you get in 5 years is a $10,000 investment compounding to $150,000, and that's being conservative given the size of the company and its potential market. The non-conservative estimate would be **$240,000** in 5 years.

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