Picking Through the Rubble - Buying Art's Way

If you listen to market pundits, half think we are in the midst of an economic apocalypse that will culminate in nothing short of a depression.  The other half are sure that we just bottomed.  Ignore both extremes.  These dogmatists know more about seeking headlines than truth.

Personally, I think its time to start deploying some capital into the carnage.  I’m not buying hand-over-fist.  That would be tantamount to drawing a line in the sand, and I play probabilities, not predictions.  There is still a ton of danger, but the chances for a sharp retracement cannot be ignored.  Last Friday, I bought into five positions which I’ll outline in the next few posts.

#1: Art’s Way (ARTW)

Description: Art’s Way Manufacturing Co. makes and sells agricultural equipment, including animal feed processing equipment, stalk shredders, sugar beet and potato harvesting equipment, pressure vessels and tanks, and modular buildings for animal containment and research laboratories.

Market cap (close of 10/10/08): $12.31 million

Revenue outlook: Last quarter, Art’s Way announced a 15% increase in revenues, to $9.42 million.  The company reported a hefty year-over-year increase in order backlog, setting the stage for future revenue growth.  I’m not fooling myself into believing that the decline in commodity prices will not impact Art’s Way.  However, Art’s Way is not a Potash (POT) or Mosaic (MOS).  Those companies sell only to grain producers.  Art’s Way sells to both grain producers and grain consumers, like feedlots.  Due to this balance, Art’s Way may be less tied to grain prices than other ag companies.  Note that Art’s Way is exposed to sugar beet production, and therefore will be adversely impacted if the outrageous sugar subsidy is curtailed.

Earnings outlook: Last quarter was very disappointing, posting $.14 EPS ($.13 fully diluted EPS), off over 40% from last year’s stunning results.   However, 9 month results increased 2.1% from $0.47 to $0.48.  The margin compression last quarter was caused by 3 factors: 1. rising input costs 2. rising wages 3. additional costs for outsourcing laser cutting.  The company has solved the latter problem by purchasing a plasma cutting machine.  I understand that many input prices, like steel, have begun to moderate.  Finally, with the economic downturn forcing workers to concentrate on holding on to their jobs, the call for higher wages has fallen to a whisper.  No analysts cover the stock.

Balance sheet: Art’s Way has some debt ($8.76 million per Yahoo!).  According to the latest 10-Q filing, this includes a few term loans due May 2013, and approximately $2.1 million drawn on a $3.5 million line of credit that needs to be renewed next April.  Should be manageable, but in this credit crisis, any debt should be seen as a negative.

DISCLOSURE: Long ARTW.  I bought in at $3.10-$3.20 Friday.