Unfortunately, I don’t think I’ll be able to dial into AEY’s conference call. So I wanted to follow up on yesterday’s post featuring questions I would ask AEY’s management with a red flag I picked up from their earnings release. If any fellow shareholder asks them any of these questions, I’d be grateful!
AEY’s 4th quarter was, to say the least, terrible. Sales were down 25%, but despite that the company managed to turn an operating profit. However, if you look at the balance sheet, their reserve for obsolete inventory went down to $1m. If you look at their 3q balance sheet, it was sitting at over $1.9m just three months ago.
So the question is: what changed? Because without that inventory reserve release, AEY reports an operating loss for the fourth quarter. And it seems strange that a company would release inventory reserves in the face of a 25% year over year sales decline unless they were forecasting stronger sales for the upcoming.
For what’s it worth, if I was asking questions (and maybe I’ll be able to dial on, who knows) I would lead off asking about that and then push them on the why no share buybacks / why the focus on acquisitions question, especially given their cash balance is now ~25% of their market cap.
Disclosure: Long AEY
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I’ve been keeping an eye on AEY since you mentioned it, don’t have a position though. I really don’t like that the CEO repeatedly mentions they want to do acquisitions in their latest press release:
“This year, the Company began to make changes to the management team and our business to better position our Company for growth both organically and through acquisitions.”
“Looking ahead, we are currently seeking new acquisition opportunities that will enable us to expand the scope of our business within the cable industry.”
Capital allocation does not seem to be very rational, I don’t expect any buybacks / dividends soon.
I also have some questions about the way they value their inventory: “Inventory is stated at the lower of cost or market, with cost determined using the weighted-average method”. I’m guessing the market for their products is not very liquid so it is very easy to “mark-to-model” instead of “mark-to-market”. And for the cost price they take the weighted average, in other words: we bought some shit years ago and we still use the purchase price. Not surprisingly they write down their inventory every year:
“The Company recorded charges to allow for obsolete inventory during the fiscal years ended September 30, 2012, 2011 and 2010, increasing the cost of sales by approximately $0.6 million, $0.4 million and $0.8 million, respectively.”
Looks cheap, but I’m not convinced yet.
And yeah, the inventory write-up looks really dubious.
Just listened to the call and read 10-K. Inventory was written down, including a huge chunk of what was reserved, so not as bad as it first looked.
Unfortunately, the capital allocation plan looks even worse after the call. When pressured on what price buybacks may be appropriate, it seemed management didn’t think today’s price represents much of an opportunity, and the oft-repeated (among smallcaps) stock liquidity excuse was once again cited as a reason for why it’s not even worth trying!