A couple of years ago I wrote my initial story on Avalon Holdings Inc. (AWX). The main reasons I liked the stock at that time was because it was trading at a steep discount to the underlying assets that the company owned, and it had just brought on a new CEO to run the waste management side of the business, which offered some potential for growth.
There have been quite a few developments since I wrote the first story that I thought now would be a good time for an update on AWX.
The first major development since the last update is that the new CEO Stephen Berry resigned after only 1 year on the job. No real reason was given for the resignation. One can only speculate that he either did not produce as promised or did not get along with the Chairman of the Board, Ron Klingle. Mr. Klingle owns a controlling position in AWX and resumed being both positions as CEO and COB.
The second major development is the Oil & Gas Boom that is developing in Ohio. A recent article in the Seattle Times sheds some light on this development. This has already begun to positively impact AWX's top and bottom lines. Year over year revenues grew 24% for fiscal year 2011, and returned to profitability for the first time since 2008. The company's 4th quarter earnings which were just released last week show an acceleration in growth of both revenues and earnings.
Not only will the company indirectly benefit from the increased drilling activity in Ohio, but they are now positioned to potentially collect oil and gas royalties directly from the leasing of land owned by the company directly.
This was taken from a recent 8K filing:
On December 14, 2011, Avalon Holdings Corporation and its wholly owned subsidiary, Avalon lakes Golf, Inc. (together "Avalon") received executed lease agreements and initial one-time bonus payments of approximately $.4 million from an energy company for leasing approximately 200 acres of land for the purpose of drilling for oil and gas. Avalon will recognize the initial bonus payments as other income in the fourth quarter of 2011. The lease agreements also provide Avalon with the potential to receive royalty payments in the future. At this time, these royalty payments are not determinable.
One of the negative by products of all this drilling is the massive amounts of waste water that the process produces that needs to be disposed of in a safe manner. Avalon is currently positioning itself to benefit from this need. The following was take from the company's most recent 10-K filing:
Due to the increase of oil and gas drilling in the Marcellus Shale and Utica Shale regions located in northeast Ohio and western Pennsylvania, Avalon is exploring and researching the possibility of drilling deep waste water wells for the disposal of the brine waters from such drilling and, as such, has purchased options on a number of properties for this purpose.
Up to this point I haven't even mentioned the golf & country club business that AWX owns, but with a mild winter / spring and an increase in wealth attributed to the Oil Boom, things are looking brighter for this business as well.
The great thing about this stock at current prices is it is still trading at deep discounts to both its underlying assets and its revenue streams. It closed Wednesday at just under $4 a share. The company has $1.90 per share in cash with no long term debt. Its price to sales ratio is .285 and its price to tangible book is .385. It is not often you can own a potential growth story at such discounted prices and a potential big payout should the company strike oil!
Lastly, I want to touch base on the drama between Ron Klingle and Dr. Anil Nalluri. Dr. Nalluri has taken down his website and has decided to be an an ally of Avalon Holdings. He has continued to buy the stock over the last 2 years and is now Avalon's 2nd largest shareholder with 589K. Both him and Ron Klingle essentially have their life savings invested in Avalon Holdings Inc, and as far as my analysis goes, I believe they will both be handsomely rewarded one day in the near future.
Disclosure: I am long AWX.