This article originally appeared on The DIV-Net March 29, 2010.
Linked here is a detailed quantitative analysis of McGrath RentCorp (MGRC). Below are some highlights from the above linked analysis:
Company Description: McGrath RentCorp rents and sells modular buildings and electronic test and measurement equipment; and manufactures and sells portable classrooms.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
MGRC is trading at a discount to only 1.) above. The stock is trading at a slight discount to its calculated fair value of $25.70. MGRC earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
MGRC earned one Star in this section for 3.) above. MGRC earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1990 and has increased its dividend payments for 17 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to > MMA
MGRC earned a Star in this section for its NPV MMA Diff. of the $2,479. This amount is in excess of the $1,800 target I look for in a stock that has increased dividends as long as MGRC has. If MGRC grows its dividend at 10.3% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.98%. MGRC earned a check for the Key Metric ‘Years to >MMA’ since its 2 years is less than the 5 year target.
Other: MGRC is a member of the Broad Dividend Achievers™ Index.
Conclusion: MGRC earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks MGRC as a 3 Star-Hold.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $27.63 before MGRC’s NPV MMA Differential decreased to the $1,800 minimum that I look for in a stock with 17 years of consecutive dividend increases. At that price the stock would yield 3.11%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,800 NPV MMA Differential, the calculated rate is 9.1%. This dividend growth rate is slightly less than the 10.1% used in this analysis, thus providing a small margin of safety. MGRC has a risk rating of 1.50 which classifies it as a low risk stock.
MGRC’s debt to total capital is currently at 50% and the company has seen negative free cash flow in 6 of the last 10 years. Even though MGRC is trading below my $25.70 fair value price, I will not give it serious consideration until the company lowers its debt to total capital to below 45% and goes 10 years without negative free cash flow. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in MGRC (0.0% of my Income Portfolio). See a list of all my income holdings here.