The Safer and Cheaper ADDvantage

Feb.14.11 | About: ADDvantage Technologies (AEY)

While most stocks are rising in this heated market, there are still a few names that investors are kicking to the curb in favor of the hot numbers. Following the company's earnings release last week, shares of ADDvantage (NASDAQ:AEY) fell 10%+, offering investors an entry point for the stock at a fairly cheap price.

The last time I discussed ADDvantage Technologies, the stock was significantly more expensive, and its business risk was significantly higher. In just a few short months, however, both of these issues have been corrected.

First, the company's stock price has fallen 25% from its December high. The company now trades for just $27 million, despite operating income of $34 million (including $7+ million in fiscal 2010) over the last four years. This company is a steady earner, as operating margin has only fallen below 15% once in the last eight years. (In 2009, operating margin fell to a still-healthy 13.7%.) Considering the strong and steady earnings, the company is also conservatively capitalized, with cash of $10 million against debt of $13 million. (There is a $1 million penalty for prepayment of debt, which is why the company is maintaining both a high cash and debt balance.)

But in the months leading up to December, the worry for value investors about ADDvantage was the upcoming expiry of its contract with Cisco (NASDAQ:CSCO), which supplies 35% of the products ADDvantage sells. But late last year, ADDvantage and Cisco finalized a new agreement whereby ADDvantage is now allowed to sell more Cisco products than it was previously.

As a result of price appreciation last year, ADDvantage is a stock that already currently appears on our Value In Action page, following a stint on our Stock Ideas page. But as a result of its recent price drop, along with the reduction in risk associated with the new Cisco agreement, it returns to the Stock Ideas page anew, as the stock once again appears to trade at a discount to the company's earnings potential.

Disclosure: Author has a long position in shares of AEY and CSCO.