We have conducted a screen for companies that appear cheap based on tangible book value and are expected to generate profits for the foreseeable future. We excluded banks and insurance companies as well as China-based companies from the screen to focus more on industrial, services and other types of businesses. The recent fraud epidemic among Chinese reverse-merger companies listed in the U.S. gave us pause with regard to Chinese companies that look cheap on a qualtitative basis.
In addition, we wanted the resulting companies to have at least 10% insider ownership in order to assure reasonable alignment of interests between management and shareholders. Interestingly, our demanding criteria resulted in only half-a-dozen micro-cap companies passing the final screen. The 10% ownership threshold was apparently too onerous for some larger stocks. Here is the final list:
- ADDvantage Tech (AEY) ($2.60 per share; MV $26 million; EV $29 million), based in Broken Arrow, OK, distributes and services electronics and hardware for the cable television industry. The products sold and serviced by ADDvantage are used to acquire, distribute, receive and protect the communications signals carried on fiber-optic, coaxial cable and wireless distribution systems. EBIT rose 31% from $5.8 million in the fiscal year ending September 30, 2009 to $7.6 million in FY10, while revenue rose 12% during the period. CEO Ken Chymiak commented in May on the unfavorable industry dynamics: "...the cable television industry is experiencing a prolonged period of limited capital expenditures by MSOs on plant expansion projects and bandwidth upgrades in order to further conserve cash. We believe that returning equipment sales to pre-recession levels will be difficult to achieve until these plant expansions and bandwidth upgrades occur at the larger MSOs."
- American Biltrite (ABL) ($8.30 per share; MV $29 million; EV $40 million), based in Wellesley Hills, MA, has the following business assets: a tape division, which produces adhesive-coated, pressure-sensitive papers and films used to protect material during handling or storage; the jewelry division K&M Associates; and a Canadian division. All three of the company's divisions were profitable in 1Q11, with improved results over the same period last year. However, Chairman Roger Marcus warned of input cost increases: "Unfortunately, the positive benefit of this sales performance was mitigated by significant raw material cost increases. These divisions are attempting to recover some of these additional costs through price increases. However, further inflationary pressures are continuing during the second quarter of 2011."
- Books-A-Million (BAMM) ($3.30 per share; MV $51 million; EV $68 million), based in Birmingham, AL, is a book retailer in the southeastern U.S. Founded in 1917, it operates both superstores (8,000 to 39,000 square feet) and traditional bookstores (2,000 to 7,000 square feet). The number of stores increased 4%, from 223 in the fiscal year ended January 30, 2010, to 231 in FY11, while revenue decreased 3% during the period. The annual dividend of $0.20 per share implies a yield of 6.2% (unclear if it is covered on a forward basis due to a lack of earnings estimates). Like Borders and Barnes & Noble (BKS), Books-A-Million has been under assault by the likes of Amazon.com for some time, and the financial performance is showing it.
- Mod-Pac (MPAC) ($6.40 per share; MV $19 million; EV $19 million), based in Buffalo, NY, is a value-added, on-demand print services firm focused on the design and manufacture of folding cartons. In 2009 Mod-Pac exited the specialty print and direct mail markets to focus resources on the core folding carton product line. Gross profit rose 19% from $7.4 million in 2009 to $8.8 million in 2010, while revenue remained roughly flat at $49 million in the same period. The company has $1 million of net cash and $25 million of tangible book value. In May, Mod-Pac boosted its share repurchase authorization by 200,000, with CEO Daniel Keane saying the buyback reflected management's "continued confidence in our business."
- Optical Cable (OCCF) ($3.80 per share; MV $25 million; EV $31 million), based in Roanoke, VA, and offers fiber optic and copper data communications cabling and connectivity solutions primarily for the enterprise market. It also offers an integrated suite of high quality, warranted products which operate as a system solution or seamlessly integrate with other providers’ offerings. OCC’s product offerings include designs for uses ranging from commercial, makes enterprise network, data center, residential and campus installations to customized products for specialty applications and harsh environments, including military, industrial, mining and broadcast applications. OCC products include fiber optic and copper cabling, connectors, patch cords, racks, cabinets, datacom enclosures, and other equipment. Gross profit rose 20% from $19.8 million in the fiscal year ended October 31, 2009 to $23.8 million in FY10, while revenue rose 15% in the period.
- Smith-Midland (OTC:SMID) ($1.80 per share; MV $8.8 million; EV $9.8 million), based in Midland, VA, provides precast concrete products for use in the construction, highway, utilities and farming industries. The company's customers are primarily general contractors and federal, state, and local transportation authorities in the U.S. Wall sales, including soundwall sales, architectural panel sales and slenderwall sales, rose 27% from $9.8 million in 2009, to $12.4 million in 2010, while total revenue increased 7% to $32 million in the period. While 1Q11 sales were down from a year ago, CEO Rod Smith recently stated that "the company, as well the construction industry as a whole, is beginning to see signs of improvement from both the private and public sectors in the number of projects being financed and bid by owners and general contractors."