First, let me say I’ve been quite lax in my posting, and for that I’m sorry. Real life sometimes gets in the way of these things! I will try to respond to all of the backlog of comments in the near future, as well as start posting content soon!
Anyway, I wanted to quickly mention a couple to happenings within my portfolio that show the importance of reading through filings and checking the fine print. Often times, the real big news stories can be buried deeper than the headlines.
For example, check out the disclosure of annual director election from Addvantage (AEY). Insiders control enough shares to effectively determine the outcome of any election, so why bother reading the results, right???
Wrong.
Look at the last paragraph of the release; the company paid off $9.4m in debt- basically all of their debt except for a small mortgage! This debt paydown frees them of debt covenants and gives them the option of repurchasing shares with their excess cash. Using some rough estimates, $AEY should have $3m in excess cash after the debt paydown. With a market cap of $22m, that’s some serious share repurchase potential. Remember, the company trades for under 10x P/E, 0.6x book value, and less then NCAV, so share repurchases could drive meaningful value creation.
For further evidence, check out OPST’s recent 10-Q. Revenues were down 24% YoY; time to panic, right? (Since we’re panicking, I’m assuming we’re just going to ignore the ~$11.75 per share in excess cash and investments)
Not quite. Backlog is up 10-15% YoY, and the company announced expected sales for the second quarter. Doing a bit of quick math, you can see the company’s expected sales for 2Q plus their sales from the most recent quarter ~ = last year’s first half sales. In other words, revenues were likely down due to some combination of timing issues and sales bottoming in the second half of last year. Sales look to be at least flat and are likely increasing significantly as their cycle gains strength.
ATPG may be a bit guilty of this as well. They announced a $15m expansion of their first lien facility and a slight drop in the interest rate; what they didn’t really highlight was asset sales + pending asset sales of $160m. Given how cash strapped the company is, that’s some pretty big news! Now, it’s true that we don’t know pricing and terms of the sales… maybe the company was trying to hide that? But still, for a company desperate for cash, that’s some interesting news.
One last bonus tid-bit: it wasn’t exactly buried in the fine print, but Asta (ASFI)‘s new share buyback program has to be considered a huge plus. Management had frequently said the reason they weren’t buying back shares was due to timing concerns. This program takes those concerns off the table. The program expires in one year, and it could be ASFI’s way of saying that, come hell or high-water, they plan on buying back 15% of shares within the next year if the prices stay this low.
Bringing you the content on this site involves a significant amount of time and effort. If you like my work, please support my site by shopping at amazon.com! Doing so costs you nothing (the prices are the same as if you went to amazon directly) but results in referral fees for me that I use to support my site.
Disclaimer
The content contained in this blog represents only the opinions of its author(s). I may hold long or short positions in securities mentioned in the blog. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author(s).
Related posts:
Follow me on Twitter
(Figures in Millions) Lets look at AEY the way Buffett does in his latest annual letter regarding IBM and their share buybacks. AEY currently has 10.2 shares outstanding. We think they will have around $2.84 in cash after the prepayment of their debt. In the scenario where they use all the cash to buy back stock (I know this is unlikely given their need to have some cash on hand to operate their business) at a price of $2.17, they would be able to buy 1.3 shares back. So their new shares outstanding would be 8.9. Let’s say for example that you own approximately 5% of the company, that equates to owning .51 shares prior to the buybacks. Post buyback, your ownership has increased from 5% (.51 / 10.2) to 5.73% (.51 / 8.9), or has increased nearly 15%.
Additionally, this is simply at this very moment in time. If the company continues to produce cash flow say $6 per year, they would AT LEAST be able to increase your ownership by around 15% per year buy doing the same buybacks.
Great points Nielsen!
I like the AEY news. After their small acquisition and today’s news I’m pretty happy about their capital allocation so far.
However, listening to their conference calls I get the impression that AEY management is not going to buy back shares. I made a note on one call where they said they were “very reluctant” to do a buyback and they indicated that the low trading volume was a big problem in that regard. If a big shareholder wants to sell his shares to the company at an attractive price, they will probably do it though. A dividend is more likely in my opinion.
Regardless, any return of capital to shareholders should help the share price at this point. AEY, I think, is viewed by most as a company that has most of its capital permanently tied up in inventory. The moment investors see some of AEY’s cashflow being returned to shareholders that perception will probably change.
I don’t disagree with you. They have repurchased shares before though, and have no div history, so I still do think the buyback is more likely
While a share buyback at below TBV would be a tremendous tax-free option for shareholders, I believe the small float of available shares severely prohibits this. The two brothers own approximately ~67% of the company, and that was before the Form 4′s were filed last week. With 10.21m total shares outstanding, there are only 3.37m shares in the float that they could possibly purchase. I believe that the company being taken private is a high possibility.
All in all, I’m very pleased with the management team. They continually grow book value, generate FCF, and have apparently made a valuable acquisition. I plan on continually adding to my position of AEY up until a price of about $3.75, which is right at 1.1x TBV.