Underappreciated and, thankfully, undervalued, high quality micro-cap stocks are the loose change lost in the deep recesses of the stock market's couch.
ADDvantage Technologies Group, Inc. (NASDAQ:AEY) is the loose change we'd like to highlight today.
AEY, through its subsidiaries, distributes and services a line of electronics and hardware for the cable television industry. The products AEY sells and services are used in communication signals carried on fiber-optic, coaxial cable and wireless distribution systems. Its customers provide a range of television services including television, high-speed data (Internet) and telephony.
With a market cap of just over $31M, it certainly fits the profile of a micro-cap stock but let's dig into the fundamentals:
Sales to AEY's Largest Customer Accounted for Approximately 7% of Revenues in 2009
When dealing with smaller companies, this is the first thing to check. I quickly pop over to the SEC EDGAR system, look at the company's annual report (10-K), and with a bit of help from the "Find" tool in my browser, get this information within a couple minutes.
OK great. AEY losing their biggest customer would certainly hurt sales but it's not sufficiently significant to worry about.
Good Balance Sheet: Current Assets Cover Current Liabilities and Total Assets Are at Least Double Total Liabilities
AEY's Current Ratio currently stands at 7.95, which is fantastically high. The problem is that most of AEY's Current Assets are made up of inventory, which isn't the most liquid item on the balance sheet. Luckily though, ADDvantage has enough cash to more than easily pay off any short-term debt or accounts payable.
This is pretty important because you never know when a debt might be called early. Nothing can destroy shareholders' equity faster than trying to sell illiquid assets quickly.
Excellent Capital Allocation: $111.60 of Cash Is Created for Every $100 Spent
At Vuru, we're big believers that cash is king. "Earnings" don't matter if a company isn't adding to their bank balance.
Thankfully, AEY is providing an annual cash return of 11.60% on any capital it invests.
Excellent Business Performance: Consistently Delivered Positive Free Cash Flow for the Past 10 Years
Small companies that make it rain in a drought are few and far between. They are resilient and resourceful, and if you can buy them for a discount, a great addition to your portfolio.
In the past 10 years, we've had two recessions, one of which was the longest since the Great Depression. AEY's ability to continue to make money in these tough times speaks to the quality of their business & their stewardship.
Knowing that ADDvantage can weather recessions well takes a lot of risk out of the picture.
ADDvantage Technologies Group Is Significantly Undervalued From a Growth Perspective
The Vuru Engine determines a stock’s growth price based on the company’s ability to grow FCF in the future. AEY is undervalued by 163.28%, according to this approach.
The Vuru Engine has applied a growth rate of 11.95% to the free cash flow over the first ten years, a terminal growth rate of 3% for years 11-20, and has used a 15% discount rate to find the present value of future cash flows.
- Vuru Growth Price: $8.64
- Current Price: $3.28
AEY has a lot going for it: a solid balance sheet, good management, and a business that has been able to maintain profitability in midst of nasty recessions.
In our opinion, the cherry on top is AEY being significantly undervalued.
It's too bad for Wall Street that they're too big to be able to play on this field. That's one of the advantages of being a nimble individual investor. We can often get our hands where Wall Street can't and if we do it the right way, it'll pay off.
NOTE: Please read our disclaimer.
Disclosure: One member of the Vuru team is long AEY. He purchased a small position in August 2009, way before we even thought of writing this article.