This 30-Year-Old Appliance Recycling Business Looks Surprisingly Solid

| About: Appliance Recycling (ARCI)

I like when I find these "old timer" small-cap (actually, micro-cap in this case) niche players that have seen their stock drop for reasons other than competitive influences or long-term fundamental financial issues. I am always putting small amounts of money in stocks like these with the thought that, yes, I could lose it all, but, more than likely, I am looking at a "double" or "triple".

When companies want to get rid of old appliances, they often call Appliance Recycling Centers of America (NASDAQ:ARCI), a fascinating small-cap company from Minneapolis that has been handling the pick up and disposal of used appliances for more than thirty years. They take care of the logistics of handling the old appliances, which many companies aren’t set up to do, thereby minimizing liquidation costs. Sometimes they re-sell the appliances, or parts of them; otherwise they handle the complexities of getting rid of them. They also distribute unused new appliances, such as close-outs, factory overruns, and scratch-and-dent units.

The company also provides recycling services -- both for their corporate clients as well as curbside pickups in Los Angeles and Minneapolis. Its clients include utilities (which often encourage their own customers to switch to more efficient new appliances), vending-machine companies, property managers, and appliance managers.

I like this company in part because it is one of those growing niche businesses and, of course, because it is green; ARCI promises to handle these tricky waste processes in environmentally friendly ways. But I also think the numbers look very solid and it’s a strong company with a long track record that might be a prime candidate to be bought by a larger company.

The stock has taken a real hit in the past few months, and it’s currently trading below $2.00, way off its 52-week high of $10. There have been some legal problems, and the CFO left not long ago, but the company’s revenues have been steady and I think this could be a buy at the current price. But I also think ARCI has an unusual set of skills and systems in place that will continue to be useful to its current clients, and its logistics know-how could conceivably be very helpful to a larger company that could turn ARCI’s strengths to new pursuits and thus new revenues.

To be sure, this is a company that has fallen on hard times. Their most recent quarterly release mentioned that the homebuilding/improvement slowdown has effected their business. This should not be overlooked as an issue but I see it as a small enough part of their business so as to not threaten their overall staying power.

But I think it’s at the bottom and things are going to get better. As appliances get more efficient and thus more cost effective, we’re going to see more and more companies buying new systems -- and needing a way to dispose of the old.

Type of stock:
A great company with an overly depressed stock price. A green logistics and corporate-services company that has been in business for thirty years and has recently suffered a serious downturn in its stock price.

Price target:
Given that ARCI is currently 80% off its 52-week high, I’d think about getting in now. You can ride it back up and sell when you’re happy with the gain, or hold out in case a larger company sees its value and makes an acquisition. I may be buying this stock in the next week myself.

ARCI 1-yr Chart