Abatix: A Profitable Net Net Play

| About: Abatix Corp (ABIX)

Abatix (OTC:ABIX) is a microcap company that distributes personal protection and safety equipment. Though the company has been profitable for each of the last 5 years, the company is currently a net net, as it trades below the value of its current assets minus all of its liabilities.

I love investing in profitable net nets because the risk reward is so great. There is extremely limited downside, as you invest in a profitable company that trades for less than liquidation value, and the upside can be anywhere from decent (just trading up to liquidation value) to extreme (multiple expansion, the business becomes extremely profitable, good catalysts, etc.) As the market continues to run up, I find myself more and more attracted to the few situations like this I can find.

Let's take a look at the business. ABIX is an every day distributer (much like BSHI, another net-net I recently discussed). They purchase items from manufacturers, bring them to their distribution centers, and sell them for a markup. This is a pretty simple business model to execute, and, as such, there are no barriers to entry in this industry. While the industry is competive, the company is well managed and consistently profitable and the company consistently earns average ROEs. What makes the company interesting is they actual enjoy a slight bonanza when natural disasters happen. The company enjoyed a record year in 2005 in the wake of hurricanes Katrina and Rita. In some ways, the stock can also act as insurance in a portfolio. If some form of unexpected natural disaster happens, the company's earnings could shoot up again, taking the stock along with it.

The company currently has a market cap of ~10.5m. They have current assets of 24.8m, almost all of which is accounts receivable and inventories. While having a large inventory balance in a net net can be worrying, the company turn inventory over ~6 times per year, so it's relatively fast moving and not too big a cause for concern. They have total liabilities of 9.1m (all liabilities are current), so their net current assets = 15.7m, 50% above today's stock price.

The company is trading cheaply on other metrics as well. Its trades at a PE of ~9, and its earnings have been depressed by the recession (more than cut in half from 2008 to 2009). However, earnings are starting to recover (operating income up over 100% year over year), and even in 2009, its least profitable year in the last five, the company was solidily profitable.

In my mind, the main risk to an investor is extreme illiquidity risk. I rarely see stocks trade with as wide of a bid ask as ABIX does (I normally see bid ask spreads of around $1 per share, or 20% of the stock price.). It's also tough to get a buy or sell order in, as the company has hit my buy target several times but I've been unable to get allocated any shares to purchase.

I really like this idea - a combination of low risk from the current asset protection, upside potential from continued earnings growth, and the "insurance" from natural disasters it offers make this a very attractive play. Additionally, there is something of a catalyst here, as the company approved the repurchase of $500k of stock at the start of the year. While they have yet to act on this authorization, it represents 5% of market cap and I think the authorization shows the company is thinking about enhancing shareholder value. If they follow through on the buyback or some other form of value enhancement, the stock price should reward investors at today's prices nicely.

Disclosure: I am long OTCPK:BSHI and may go long ABIX at any time