Phil Scanlan's  Instablog

Big things could come from this small company, but first have a look at what they have squirreled away.

According to Yahoo, Acorn (ATV) have a market cap of $110 million dollars, but are sitting on $139 million in cash.

Apart from buying a dollar for 80 cents, there are many other things to like about Acorn. But first let me briefly tell you what they do.

Acorn (ATV) are in the business of selling to Chinese consumers. They claim to be one of the largest TV direct sellers in China both in terms of revenue and air time purchased. Acorn also sell through a nationwide distribution network, catalogs, third-party bank channels, outbound telemarketing center and over the web. In short they are learning the best ways to sell to Chinese consumers and I think that in itself is valuable intellectual property that gives Acorn (ATV) lots of opportunities.

A negative is they lost money last year, but based on the 2009 guidance they confirmed in August, they are expecting a strong return to profitability this year:

"Given the Company's strong financial results for the first half of 2009 and positive outlook for the remainder of the year, Acorn reaffirms its guidance for 2009 of net revenue in the range of $310.0 million to $350.0 million, and net income attributable to holders of ordinary shares, excluding share-based compensation expenses and investment income, to between $14.0 and $16.0 million, in line with the Company's statements in May 2009."

So we are looking at buying a dollar for 80 cents and getting a 15% return in terms of net income this year.

Not bad - but that is not what I like most about Acorn (ATV):

China

During these tough economic times, China has remained an engine of growth. With its traditional export markets doing it tough, it is going to look more and more to its domestic market (the consumers Acorn (ATV) sells to) to drive its growth in the future. In other words, I believe the Chinese government is going to be encouraging Acorn's target market to buy more.

Currency

Over the long term, I think the Chinese currency is going to continue to strengthen against the US dollar. This will compound the profits generated by Acorn (ATV) for US investors i.e. the profits they generate in China will be worth more US dollars because of the exchange rate movements.

Hidden Asset

They also have an investment in a company that produces software for share traders. With the Chinese stock market being what it has been, I can understand that being very popular. From what I gather, Acorn (ATV) used its distribution channels to sell the share trading software into the marketplace but government regulations now prevent that. Last Quarter they sold part of their holding for a handsome profit - but if you listen to their earnings call, you will realize they are holding on to a large chunk of equity in the company to cash in on when this software company has its IPO. How much is that worth? I do not know - but it could be a nice bonus.

Share buy backs and special dividends

According to the earnings call, they had been buying back shares (why wouldn't you when you can buy $1 in cash for 80 cents) but stopped because the market was thin and it had the potential to artificially inflate the share price. They were questioned on this during the call and the possibility of paying a special dividend to shareholders was also raised. You really need to listen to that conference call to get the context of this. I do not want to overstate it or understate it. Take the time and listen to it. For me, I liked what I heard - although I think some of the questioners could have done a much better job nailing this down.

Thin market

If the market is so thin that a share buy back drives up the price, won't the same thing happen when the good news about the company starts to get out. Lets face it, there is little research done on this company, not even on the investment blogs. That will change as the company's success grows and with luck the price will respond.

US Listing

I want exposure to the Chinese marketplace, but I feel more comfortable doing so with companies that are traded on the US stock market - at least I know they will be subject to some well known US regulations. Their CEO and auditors should take those regulations seriously.

All of the above are great - but they are not what I like best about this company.

So you want to know what I like best?

You have probably heard the saying that it is not the best product that conquers the market, but often the best marketers. Well Acorn (ATV) is a company with strong marketing capabilities that is increasing its focus on proprietary products - their marketing strength could establish market leaders that then can be spun off - as they are talking about spinning off their investment in the share trading software company I mentioned above.  Remember China is a developing market and tomorrow's market leaders are being born and marketed today. A spin off every few years on top of their organic growth could supercharge the returns on Acorn's (ATV) shares.  

Reading their earning report, they already have a few possibilities in their stable:

"Ozing, the Company's electronic learning product and Meijin, the Company's electronic dictionary, continued their recovery, benefiting from the Company's returned focus to building propriety branded products. In the second quarter 2009, sales in Ozing reached $8.1 million from $2.8 million in the same period in 2008. The increase in sales for Ozing also included the addition and growth from the Company's touch reader product series, which was introduced in the third quarter 2008. Sales for Meijin in the second quarter grew 12.4% to reach $1.8 million from $1.6 million from the second quarter 2008. Growth in sales of our Ozing and Meijin products was driven by increased advertising time, improved technology, competitive pricing and consolidated distribution channels."

I like the company and have invested. Check it out yourself - you may like it as well.