It is a difficult time to be a value shopper in the realm of small cap stocks. The Russell 3000 trades at 30x earnings and 4x sales. As someone who usually buys growing companies with PEs under 10, PS under 1 for less than book value, the options in this market are virtually non-existent. While I am unable to predict if and when the market will return to attractive valuations. I will only buy something when I believe it to be a good value. Recently I focused most of my stock ownership on overseas companies, many of which are more reasonably priced with better growth prospects.
I am writing to share what I feel to be one of the few outstanding values in the US Market. Kansas-based Butler National Corp. (OTCPK:BUKS). Butler and its subsidiaries operate in two unrelated segments: Aerospace and Professional Services . The Aerospace segment is a 50 year-old business that provides maintenance, repair, and overhaul for aircraft. Butler has many FAA approved STC (Supplemental Type Certifications) to make modifications to aircraft.
The professional services sector provides casino management as well as casino design and engineering services. The company currently has a contract to manage an Indian Casino (The Stables in Miami, OK) through 2018 and a 15 year contract to manage, The Boot Hill Casino, a State of Kansas owned casino through 2022. Operationally, the Boot Hill Casino is a much greater contributor to the business financially.
The combination of two seemingly unrelated businesses is part of the reason for the ridiculously low valuation. The separation of the two businesses is something that may contribute to shareholder value going forward.
The Value Proposition
That is why you are here. Butler has what I am looking for in a stock: it is a growing business trading at .25x sales for half of book value. There is significant insider ownership (25%, the CEO owns 8.5%). No evidence of accounting or other red flags common place in the micro cap world (e.g. paid stock promoters, excessive dilution, self dealing executives). Instead we have a long-term established profitable business with excellent near-term and long-term prospects.
This business that is currently valued at 11 million dollars generated cash flow of 6 million in fiscal 2014. The company was able to pay down 5 million in debt in fiscal 2014. In the Q4 conference call, the CEO and president discussed expectations for 2015. The are projecting profit of .01-.02 cents per share per quarter this year.
First logical question, how did this stock get to the slump that it is in?In 2011 the stock traded nearly 4x higher than it is currently. Over the past two years the company has faced challenges in each business. Revenue of the largest casino Butler manages were impacted by the shut down of the customer busing program. Due to the relatively remote location of this casino bringing in customers from neighboring areas is essential to their business. What has changed? The company has received permission to resume the busing program. The plan is to expand the busing program further over the next year. Longer-term, the addition of more hotel rooms will help boost revenues and allow the Boot Hill Casino to draw customers from farther away. Another challenge in this business was the botched roll out of new casino management software. The software they purchased from Bally Technologies (NYSE:BYI) did not deliver as promised. This has cost the company money in lost revenues and time. They have since purchased software from another vendor and won a jury verdict (in March) for 1.43 million against Bally for their failure to deliver as promised.
While the gaming management business was facing challenges so was the aircraft business. After years of strong growth, the aircraft business slowed as a result of decreased domestic demand for services, especially in from the military sector. Butler responded by reducing costs and working to market themselves internationally. Butler has been successful in their efforts to grow international sales.
Aircraft Sector International Sales Growth:
|Fiscal 2012||2.8 million|
|Fiscal 2013||3.2 million up 14%|
|Fiscal 2014||4.8 million up 50%|
Butler also sought additional STE certifications as there is less competition and greater margins in this area. As an example, in late 2013 they became a provider of a certified noise solution for the 20 series Learjets (avconindustries.com/blog/). The Learjet 20 series business jets will not be able to fly in the US (and likely many other countries) at the end of 2015 due to the noise of their turbo jet engines. The process of seeking these certifications such as the Learjet 20 series took time and money; however, they have contributed to a strong turnaround in that business segment. In Q3, Butler reported 3.8 million in sales in the aircraft sector a 44% increase over the previous year. Q4 was even better for the aircraft division: Sales increased by more than 100% to 6 million and total revenue was the highest of any quarter in the last three years. Going forward the company is expecting about 5 million per quarter over the course of the year in the aircraft sector which would be about a 25% annual increase from fiscal 2014.
What is a Fair Valuation for Butler National?
Based on several metrics Butler is significantly undervalued today. Most importantly, the market has not appreciated the significant cash flow that this company generates-6 million in fiscal 2014 and 8+ million in 2015.
NA (2.5-5x fwd. estimates)
|TAT Technologies (NASDAQ:TATT)||.85||.8||42||10|
|Triumph Group (NYSE:TGI)||.9||1.4||16||47|
|B/E Aerospace (NASDAQ:BEAV)||2.3||3.3||22||10|
|Wesco Aircraft (NYSE:WAIR)||1.47||1.79||16||57|
|Century Casinos (NASDAQ:CNTY)||1.21||1.16||27||21|
|Pinnacle Entertainment (NASDAQ:PNK)||.66||5.32||NA||6.6|
|Boyd Gaming (NYSE:BYD)||.38||2.25||NA||4.4|
|Transworld Corp. (OTCQB:TWOC)||.78||.69||12||6.4|
As I highlighted here, the improvement in their business and extreme undervaluation are reasons for a significantly higher (2-3x) share price today. There are several other catalysts that could help boost the share price to 7x the current price or more:
- National listing, this is something that has been discussed by the company previously. This would require a reverse split which could be good for stockholders as the low stock price scares away many potential investors.
- PR firm, the company indicated it is considering moving forward with this in the next couple quarters during the Q3 conference call.
- Separation of businesses, clearly having two completely unrelated business combined is hurting the valuation. The company is in talks to buyout the minority investor in the Boot Hill Casino and they have expressed that they see this as a precursor to a separation of the two businesses.
- Continued pay down in debt and increased book value. The company paid down 5 million in high interest debt last year. Reduction of debt will boost book value and profits from lower interest charges.
- Stock buyback. The company has been receiving pressure from investors to institute a stock buyback plan.
- Lower oil prices. Due to their focus on legacy aircraft, Butler would benefit from lower fuel prices as this will lead to continued investment and upgrade of the older aircraft that Butler specializes in modifying and maintaining.
- Development of land adjacent to the casinos they manage. The company owns 100's of acres which present future development opportunities.
What Are the Risks?
I like investing in deep values stocks as the low valuation offers investors some measure of downside protection. However, there are risks: Butler trades for just over quarter of where it was two years ago primarily because of a slowdown in the aviation business. The company has been working to cut costs and strengthen this business and they have had success as evidenced by two consecutive strong quarters in this sector. If Butler is unable to continue to deliver positive results the stock price would likely suffer. Butler trades for less than .20 per share and has a market cap of just over $11 million. These factors are both a blessing and a curse. The low share price and low market cap have allowed Butler to slip under the radar of many individual investors and likely all institutional investors which is part of the reason it is such a bargain. However, the small market cap and low trading volume (30-40k shares per day) mean that it can be difficult to build and trade out of positions. While the stock price has been relatively stable there is the potential for a small number of trades to impact the stock price significantly creating significant volatility.
Disclosure: The author is long BUKS. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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