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9:42 am
May 14, 2012
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Jae Jun
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I believe the buybacks is only a temp thing. Don't believe the company will continue to purchase shares.
These small companies tend to buy out other companies, but if they can get a great deal, then why not? We try to buy companies at 50c on the dollar, and in the private market, this could be even more prominent. If AEY can buy some great companies that add value to the business real cheap, then I am all for it.
From what I have seen, the company doesn't go crazy with M&A so it is only a small blip on my radar.
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8:48 am
May 11, 2012
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mihirbhatia
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Just listened to a replay of the confernce call this morning. Some quick thoughts -
Good news -
- Company spent 114,000 on buybacks. they said they bought back about 50,000 shares. that's at an approx price of 2.28. Also, they mentioned they were limited by float.
- Continues to be conservative in their growth and going forward which boades well
- Company reiterated committment to reduce inventory
- Paid of debt which Jae mentioned. Should lead to continued cash buildup. I did like their reasoning which was essentially – interest rate was increasing and we didnt really have a use for the case (which wasnt earning anything in this market) so it made sense as though it led to a negative EPS now it preserved cash and was in the long-term interest.
Bad news / Questions
- New CEO mentioned his M&A experience a few times. Looks like there its more likely they will be buying companies and growing inorganically. Tempering this is the fact that old CEO is still chairman of the board and the company has been very conservative so not likely to do silly things
- New Equipment sales declined by about $600k compared to last year despite Adams Global contibuting $1.5m. This suggests without Adams Global the new equipment sales would have been dismal. Makes me a little worried about all that inventory.
- Adam's Global margins are a lower than other business
- Inventory increased despite committment to lower it. Managmenet attributed this to Adam's Global.
All in all they seem to be doing a good job. I like that they are buying back shares at apprpox $2.30 which suggests a little downside support. Company's capital allocation decisions so far have been pretty good so not terribly worried about a "bad" M&A but something to keep an eye on inlight of new CEO mentioning M&A experience so often. Same with inventory.
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8:43 pm
March 13, 2012
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Graeme
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| Member | posts 180 |
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Yeah, I'm taking the plunge tomorrow when trading opens.
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4:35 pm
March 13, 2012
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Jae Jun
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AEY paid off their debt now. Zero debt company with lots of assets and profitable. What more is there to ask?
Thinking of buying a little more too.
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9:20 am
March 12, 2012
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Graeme
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Getting close to $2. Looking like it may be my next buy.
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7:32 am
February 15, 2012
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somrh
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I guess I don't understand what the point of (EBIT x Multiple + Cash) would be. Consider the following example.
Suppose you have two companies: ABC and XYZ. They are identical in every respect except for the following. XYZ just issued $1/share in debt and received $1 in cash.
Let's say EBIT for both companies is $1. So how would you value them? Would you apply different multiples or would you simply value XYZ as higher due to the extra cash it has?
The reason I ask is that I would want to factor in the debt into the equation if I'm going to factor in the cash. So I would probably look at enterprise value. But I suppose you could choose a different Multiple (higher multiple for no debt, lower multiple for the one with debt) to account for it differently.
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11:47 am
February 13, 2012
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Jae Jun
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Those are good rules of thumbs, but given the business, I think its best to ignore the optimistic buyer multiple of 12x EBIT.
Would be 10xEBIT at best.
Given that it is such an easy business to understand and the long history of profitability, I think a >25% discount to tangible book is a good MOS. Any other upside is being completely ignored.
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12:03 pm
February 11, 2012
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Graeme
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Jae I've been devouring those newsletters you sent out. The Ben Graham Net-Net one has some interesting valuation techniques in it, so I applied it to AEY to look for a good intrinsic value.
But first, the old faithful valuations:
Used a growth rate of just below 6% matching CROIC. FCF/share was about $0.35, so I used that in a DCF with a 15% DR and got about $3.43
Using the same numbers in a Graham formula got a $5.26.
NCAV/share sits around $2.40 which is $0.20 more than it's trading now.
Tangible book at $3.37
The three other valuation methods the newsletter uses are what he calls a "optimistic buyer" "pessimistic buyer" and a "FCFx15". The optimistic buyer is a (10 yr historical EBIT x 12) + cash which I got about $5.50. The pessimistic buyer is (10 yr historical EBIT x 8) + cash and that was $4.06. The last one was $5.25.
So it's slightly below NCAV, and a bit below Tangible book. I'd say fair value is somewhere in the $4-$5 range. But the MOS isn't enough for me right now selling at $2.25.
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12:35 am
January 4, 2012
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Jae Jun
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ADDvantage Technologies Group, Inc., through its subsidiaries, distributes and services a line of electronics and hardware for the cable television (CATV) industry. The products, the Company sells and services are used to acquire, distribute, receive and protect the communications signals carried on fiber-optic, coaxial cable and wireless distribution systems. Its customers provide a range of communications services, including television, high-speed data (Internet) and telephony, to single family dwellings, apartments and institutions, such as hospitals, prisons, universities, schools, cruise boats and others. The Company’s operating subsidiaries include Tulsat Corporation (Tulsat), Tulsat-Atlanta LLC, ADDvantage Technologies Group of Nebraska, Inc. (doing business as Tulsat-Nebraska), ADDvantage Technologies Group of Texas, Inc. (doing business as Tulsat Texas), Jones Broadband International, Inc. (doing business as Tulsat-West) and ADDvantage Technologies Group of Missouri, Inc.
Why is it Cheap?
- boring business
- reseller of equipment to companies such as comcast, direct tv, centurylink etc
- industry risk. Consolidation could mean loss in revenue. Customers have slowed down their network upgrades.
- builds up inventory of new and used equipment to sell
- not followed or held by any of the big boys
Management
- not much insider buying even at these low levels
- total exec compensation was 2.4% of revenue in 2010. Below my 3% threshold so good.
Growth
- not much room for growth. But with such a healthy balance sheet, their returns does not have to be high to produce growth.
- market is assuming that the max it can do is 4% growth by reverse engineering prices
- acquisitions will help with growth. Their acquisitions are small and targetted based on the target's distribution channel and product offerings.
Moat
- Niche player. Can't beat the OEM's in providing equipment, but does take advantage of the many black holes left behind by them.
- sustainability is absent though. A new competitor with money could come overnight and take them out.
Competitors
- competitive business
- trading at net net value means there are better competitors otherwise it wouldnt trade below asset value
Risks
- inventory valuation. If it had to be liquidated, how much would it be worth?
- Strategy of building up inventory – very low inventory turnovers. All costs money and working capital.
- New agreement with CSCO isn't the best. They now have to resell CSCO products which will lower margins.
- no dividends. just builds cash.
- dont see much chance of buyout for such a company
Valuation
- no matter what I try, I keep coming up with a low range of $2.80 to $3 which gives 34% upside potential as a minimum.
- Operating at low end of business cycle as the industry has slowed down. Cash flow will reduce.
- I'm estimating EPS of $0.28 for 2011 without doing much more work.
Catalysts
- Industry starts spending for network upgrades
- (hmm can't think of many catalysts other than being cheap)
Conclusion
Quality net net currently operating at the down cycle. Room for revenue and cash flow growth if the industry picks up. A bit too reliant on external factors but management has been able to handle the business very well. Great ROE, CROIC for a net net. Not many profitable ones out there. Business is easy to understand and the biggest risk really comes down to whether the inventory is really worth what it is.
I wouldn't call it a value trap because their business model is consistent.
Verdict
- Management: B
- Growth: C
- Moat: C
- Risk: A
- Valuation: A
Buy a small position and wait for a long time to play out.
Other links on AEY
http://www.whopperinvestments……logies-aey
http://seekingalpha.com/articl…..good-price
http://seekingalpha.com/articl…..addvantage
http://seekingalpha.com/articl…..-micro-cap
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