Take a look at Span-America Medical System’s price chart for the past month. The chart shows a huge fluctuation from $16 up to almost $20 before dropping back almost as rapidly. First quarter results were released on May 3rd. Why such volatility?

Dividend

The company announced a special dividend of $1.00 to stockholders of record on May 20. In addition to the company’s normal $0.10 quarterly dividend, SPAN paid out a total of $1.10, a tidy 6% return based on an average closing price before the announcement.

This is the 82nd consecutive quarter that SPAN has paid a cash dividend, just over 20 years, and pretty astounding for company with a market cap of $42m. Total payments over that time represent $8.67 per share, over 50% of its current price. Paying such a dividend shows a solid commitment to returning value to shareholders, and is definitely a good sign for the financial health of the business.

Quarterly Analysis

In addition to the dividend news, the company also turned in a pretty solid earnings report despite decreasing sales across the division. Net income for the quarter increased 18% to $1.2m or $0.44 per share, primarily driven by strong cost controls. Both Inventory and Total Liabilities dropped as well, making the balance sheet look even better.

Owner’s Earnings

Based on my calculations, the company has generated approx. $2.6m in owner’s earnings YTD, a 37% increase from the same point last year – not to mention a 13% increase compared to the company’s best year ever for owner’s earnings. As this is a major portion of my valuation analysis, I feel comfortable that SPAN should be valued at the high end of my original estimate.

Other Highlights

“This was our second sequential quarterly increase in industrial sales,” stated Mr. Ferguson. “Second quarter sales rose almost 31% compared with the first quarter of fiscal 2010. Although this business represents a small part of our total sales, it has been a good leading indicator of sales trends due to our broad customer base for industrial products.”

Although sales were down roughly 5% YTD, this is a small sign of encouragement from the CEO. Hopefully these trends will carry over into the other business segments.

“Our outlook for the custom products segment is also positive. In the consumer business, we have finalized plans to supply a line of bedding products to a new, large retail customer beginning around June 2010.”

Although there is no way to tell how large this new retail customer will be, could this be a potential catalyst for improved sales results to finish out the year? The custom products section makes up 28% of total sales, so a significant increase here would have an impact on the bottom line.

Conclusion

Management continues to reward shareholders and showed good judgment during the course of the economic downturn. Even with the most conservative assumptions, I think SPAN is worth north of $20. Based on this report, I’m revising my price target slightly upward, to $27-$30, a significant discount to its current market price.

Read about my original investment thesis for SPAN

Disclosure

Long SPAN

To give some background on my investing decisions, I’ve included a sampling of my recent stock writeups:

CHDN / UBET – Churchill Downs & Youbet Merger – My first ‘special situation’ investment of the year, a merger arbitrage play. Still offering a 13% spread for a merger that will likely close in the next few weeks, although it has ran a bit the date I estimated for. Already received shareholder approval, both management teams are committed to making it work, and CHDN has sold off the necessary businesses – just need final approval from regulators.

TPCS – Techprecision Corp – A growth stock with potential that is too hard to ignore. Heavy dependence on the solar market. Stock took a huge hit after its largest customer, GT Solar, canceled a multi-million dollar order last year. Recent filings show the return of GT Solar’s business, and the company is trying to diversify and take advantage of other macro trends in medical devices and nuclear power. Cheap even if the other growth prospects don’t materialize. Value: $2 or more.

APNC – Access Plans, Inc – Went through a major acquisition last year that more than doubled the size of the company. Alternative insurance-like products in high demand as people lose their jobs and cancel traditional medical insurance. Market does not seem to be pricing in the potential of the combined entity. Insiders hold 71% of outstanding shares and have been buying more. Value is more than double the current price.

ITI – Iteris, Inc – Strong insider buying back in Feburary. Stock has dropped back after reporting tough Q4 results. Large NOL carryforwards, meaning the company won’t be paying income taxes for a long time. Upside potential once the heavy truck market picks back up and a very neat technology that has real potential. Value: $3 with upside north of $4.50

ADVC – Advant-e Corporation – Small software company with steady revenues throughout the recession. Management is paying out another $.02/share in dividends in 2010 – that’s an easy 12% return. Value: $.30

NOOF – New Frontier Media – Stock is down almost 20% from its March highs on no real news. Insiders were buying up stock at around this price back in late 2009. Large goodwill writedown in 2009 scared many investors away. Outstanding CROIC numbers >50% and very aggressive company repurchase program should drive help drive price upwards. Value: at least $4.

SPAN – Span-America Medical Systems – Company has been paying dividends for 82 consecutive quarters and just paid out a $1 special dividend, a great sign. Average CROIC of 26.5 over the past three years. Owner’s earnings of 5.2m in 2009 was the company’s highest ever despite slow sales during the recession. Value is $25+

ACU – Acme United Corporation – Maker of school supplies has been around since 1867. >5% ownership interest from two institutional investors and insiders hold 26.7% of outstanding stock. 2009 was rough but the company should bounce back and continue to deliver solid income and FCF.  Ultra conservative valuation of $13/share. Under normal growth scenarios, it should be trading between $17-$20.

Disclosure

*Long TPCS, APNC, ITI, ADVC, NOOF, SPAN, ACU, UBET. Short CHDN