Avalon is a waste management company that is starting to focus on golf course operations in Warren, OH. It was running at a small profit of around $400,000 in FY05, though most of its income came from interest payments on short-term investments that it held. Operations have now reached improved seasonal profitability thanks to increasing revenues and slightly improved margins in the last several quarters.
But the bargain seemed extra sweet since the company traded at around 50% of stated book value, even while they have essentially no debt and a large asset line item of land that is recorded at 1991-1992 cost. In addition to owning its corporate headquarters, the company owns the more than 200 acres in Warren, Ohio that its golf course sits upon.
It’s difficult to determine an accurate fair value for which the land could be sold (though it’s actually a moot point since the company is not looking to sell anytime soon), but conservative estimates would lead anyone to the conclusion that the company was (and still is) trading at a substantial discount to net asset value. It’s a pure “safe and cheap” play — the company has what I call “safe” liabilities (no long term debt, hidden off-balance sheet arrangements, etc.) well covered and exceeded by liquid or understated assets, while selling for substantially less than liquidation value.
And, keeping in mind the kicker above, revenues have been increasing, as is the bottom line.
The risk factors are also pretty obvious, but are not show-stoppers. First, the golf course and country club business is not the best for earning outsized returns. The company is profitable, but earns no better than (and often less than) market returns on its equity. Second, though management isn’t overpaid, it’s arguably not the best. Ron Klingle [CEO] has done an okay job with the company and has a long-term goals in mind (a positive sign). But, through his Class B shares, he controls the company, so outside shareholders have little say in how it’s run.
The shares have run up in the last few months, but I believe there’s still somewhat of a discount. I wouldn’t expect explosive growth from the company anytime soon, but for investors looking for an attractive value purchase, Avalon is promising.
AWX 1-yr chart: