How Low Can They Go?

WHAT DO THE following companies have in common: At Home (ATHMQ), ZAP (ZAPPQ) and Divine (DVINQ)? Of the 8,300 companies in our database, these are trading close — really close, like within 1% — to their 52-week lows. Also, they each have that nifty Q on the end of their symbols, which tells you they're bankrupt.

Clearly, bottom-fishing is about more than just finding stocks on the bottom. You've got to identify stocks that also stand a chance of leaving it. How do you do that? Our stock-screening tool is a good place to start.

We like to sort for companies that are no more than 20% off of their 52-week lows. That's not terribly low; in fact it's rather generous. But we like to keep plenty of names in the mix so that we can make further demands as to profitability and business prospects. We make sure, for example, that companies are expected to increase earnings this year. And we search for stocks with price/earnings multiples that are below their yearly earnings-growth projections.

Whichever process you choose to find unloved stocks, the most important step doesn't involve a screener. It's critical to research each company and determine on your own whether its low share price is a result of something temporary that management is likely to fix, or whether management itself is the problem, and the low share price deserved.

If you want the details on all of our bottom-fishing screen requirements, take a look at the recipe on the top right of this page. Our search reeled in 10 names, a couple of which caught our eye.

Emcor

Need to put an extra electrical socket in your bathroom? Search the yellow pages under Electrician. Need to supply power to an addition you're planning for the London Underground? Better call Emcor (EME).

The Norwalk, Conn.-based industry leader in electrical construction has participated in just about every kind of building project imaginable — casinos, highways, airports...you get the idea. And Emcor in 2002 built a nice profit for itself — $62.9 million, on revenues of nearly $4.0 billion. That marked the company's seventh consecutive increase in annual per-share profits, during which time the stock has provided a compounded return of 28% per year.

So why have shares backed off nearly 10% since the beginning of June, to about $49? Part of the reason, it seems, is profit-taking by investors who viewed Emcor's April 24 first-quarter report as unimpressive. It was, after all, the first quarter in seven years that the company didn't report year-over-year earnings growth. But part of that earnings slippage was the result of a one-time charge for the merger-integration of facility-services provider CES, which Emcor bought last December. The amount of the charge wasn't disclosed, but analysts estimate it was around $6 million. Based on the company's 15 million shares outstanding, that works out to about 40 cents per share. Exclude those 40 cents, and you've got a nice year-over-year per-share profit increase.

The acquisition, meanwhile, gives Emcor just what it needs — a steady stream of fees. Most of the company's revenue comes from contracts, which are subject to seasonal fluctuations. Facilities services, however, provide a steady paycheck for managing sites rather than building them. Emcor hopes to increase facility-services revenue from 23% today to around 50% in coming years, which might earn shares a higher valuation.

The stock currently trades at 11 times Reuters Research's whopping $4.39 consensus for 2003 earnings. That's quite a bit cheaper than peers' average 2003 price/earnings multiple of more than 16. And Emcor is expected to increase earnings at more than 15% per year over the next five years, compared with the construction-services group's 13%. Analysts say that if the company invests its excess cash flow in acquisitions during the next four years, the earnings-growth rate might turn out to be as high as 20%. And if it doesn't, the company will be sitting on around $19 a share in cash by 2006.

Yellow Corp.

Overland Park, Kan.-based trucking outfit Yellow (YELL) announced on July 8 it would buy Roadway (ROAD), its largest competitor, for $966 million. Analysts at investment banks that participated in the deal have, of course, been raving about synergies, stopping barely short of pressing together two truck models and making kissing noises.

Let's look beyond the showmanship. Yellow's offer of $48 a share, roughly a 50% premium over Roadway's previous trading price, seems just a smidgen on the high side. It works out to about 6.5 times Roadway's trailing-12-month earnings before interest, taxes, depreciation and amortization (Ebitda), compared with the 5.9 price/Ebitda multiple Yellow paid for another competitor, Jevic Transportation, in 1999.

While Roadway's focus on retail customers will complement Yellow's manufacturer base nicely, about 30% of their business overlaps. Partly for that reason, Yellow plans to continue operating the two companies separately for now, easing gradually into integration. Of course, that also means it will ease gradually into the expected cost synergies.

Ignoring the deal, Yellow's stock is cheap, trading at just 11 times 2003 earnings, compared with trucking peers' 18. And Yellow's earnings growth projection of 14.7% a year over the next five years nearly triples the group's 5.1%. Paying such a rich premium for Roadway hasn't improved that valuation any, but analysts agree that the new trucking giant will enjoy far greater pricing power for years to come.