Following up on last week’s earnings updates, another modestly busy week of earnings for my portfolio.
First up is Addvantage Tech (AEY) (see 10-q here and earnings release here). Sales were down 3% and would have been down much further if not for tremendous growth from their acquisition. However, the company remains solidly profitable, and management is starting to do a very solid job of reducing working capital to correspond to the drop in sales. The company now has more cash than debt, NCAV comes in at ~$2.50, tangible book comes in ~$3.33, and book value comes in ~$3.50. I continue to maintain a large position in the stock- in a worst case scenario, it’s worth ~tangible book, which would yield nice upside from here. Best case, it returns to its historical earnings levels, and it’s worth a nice premium to book. Either way, significant downside protection with great upside.
Next is Gencor (GENC) (see 10-q here or earnings release here). Revenue was down YoY, though operating loss slightly improved. In the press release, Gencor notes that their sales backlog has significantly improved, though they don’t provide any hard figures, and this seems to be consistent with their inventory build up in the quarter. The real value here, however, is in their cash and marketables, which have increased to ~$8.20 per share. Similar to AEY (heck, similar to almost every net-net with huge cash balances!), it’s frustrating to have a company trade for such a discount to assets and refuse to repurchase shares despite no need for all of their excess liquidity. Still, even if you think the operating business is worth $0, the stock trades at such a discount to the investing portfolio that there’s plenty of downside protection and nice upside at today’s prices.
Next we have Micropac (MPAD) (no earnings release, see 10-k here). Revenue was down 12% and operating income 33% YoY, but (more foreboding) backlog is significantly down (~30-40% YoY). Still, the company remains very profitable with ROIC metrics somewhere between good and excellent, and they trade for just 1-2x EV / EBIT once adjusting for their huge cash balance. I don’t think there’s anyone in the world who would look at this company’s ROIC (after adjusting for their excess cash balance) and earnings history and say it doesn’t deserve to trade for at least tangible BV. Tangible BV comes in at $7.25 as of their 10-K, versus today’s share price of $5.25.
Finally, while it’s not necessarily earnings related news, ATP (ATPG) announced a $140m expansion of their senior secured loan facility based on their prelim PV10 reserves at year end. Everything I’d seen by the company had said they expected ~$100m in facility expansion, so the $140m number has to be seen as somewhere between neutral and good news. The big fear around the company has been a looming liquidity crisis this year, and this should help them slightly alleviate their concerns. At the very least, it should allow them to meet their May interest payments. The stock seems to like the news, up ~10% since it was announced, though the bonds have barely budged.
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I’m also long GENC but I’m questionning the investment portfolio. Is there a way to check for possible fraud that you would know?
I believe oddball stocks had a series of posts discussing potential fraud. I honestly odn’t think it is. I had a post up earlier in the year discussing why I didn’t if you search the archives.
hi Whopper,
Two points regarding AEY:
1. while it might be disappointing that they don’t buy back shares yet, I think they are planning to use the excess cash to pay off their debt in the end this year. Will save around ~700k of interest cost a year. Isn’t that also a very good use of capital? I read somewhere they have an early payment “penalty” on the debt, which is why they haven’t paid it off yet. Haven’t confirmed this myself yet though.
2. I had a discussion with Hielko (he posted a great evaluation on AEY: http://alphavulture.com/tag/aey/ ) about the stock. We agree that it is cheap. But suppose they have this big basement full of old (and new) router, cables and tivo boxes. If there is a company liquidation, there is probably nobody who wants to buy all that stuff at book value. In that case a large (at least 50%) discount seems fair. And if you value the company as a going concern, well, there is no way they can get rid of the entire inventory and use the cash for buybacks or something. They need the inventory, having a BIG inventory is part of their business. In both cases a discount of the inventory seems appropriate, making AEY a little less attractive.
I’m curious about your take on this. You have a great blog.
1- Correct they are using it to pay off debt, and they have an early payment penalty. Still, they have more cash than debt, and a ridiculously strong liquidity position. Makes no sense not to buy back shares.
2- they have quite a bit of reserves on their inventory, so I’m thinking it’s all pretty current. I’m not investing in this company as a liquidation; I’m investing in it because it has a history of generating excess returns on capital and it’s selling for a huge discount to assets. If they had to do a firesale liquidation, would the inventory have to marked down? Probably. But that’s certainly not a base case or even an extremely bearish case!
About the AEY inventory: I listened to the Q4 fiscal 2011 conference call (the one before the most recent quarter) and I heard some interesting comments. They said about $11-12 million was Cisco inventory (some of it refurbished) and that these items can still be purchased from the factory. So it seems to me that a substantial part of the inventory is not terribly old / obsolete.
Of course their new Cisco agreement has impacted their bussines and that is a certainly a negative. The people making the ‘bear’ case for AEY all rightfully point this out. But I don’t think this is all negative, since they won’t need as much Cisco inventory in the future as they did in the past. Some of that inventory can be turned into cash and that is what has been happening the last few quarters. How far inventory levels will drop eventually remains to be seen though. Management did indicate in their latest conference call that they expect inventory levels to drop further over the next 6 months.
This situation reminds me somewhat of the Nu Horizons investment case that Barel Karsan described about 2 years ago. With NUHC the inventory could be returned to the ex-supplier, so in that sense it was less risky than AEY. That situation worked out quite well for investors in the end.
Disclosure: long AEY
Excellent, excellent points.
AEY has mentioned several times that almost all of their inventory is not prone to obsolescence risk in the sense that they will still be in demand for years to come.
Compare that to for example ASFI, where the book value is in cash instead of in inventory. Isn’t that a much ‘higher quality’ net-net in terms of assets?