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Whopper Investments
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A small, individual investor, I mainly focus on deep value micro and nano - cap companies. I especially enjoy investing in net-nets and stocks with upcoming catalysts.
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  • AWX- value trap or value investment?

    With a market cap between $10-11m, Avalon Holdings is a potentially substantially undervalued microcap with a lot of potential for value creation. AWX currently trades for under 0.3x BV. The company has 5.7m in cash and practically no debt (230k in capital leases), so half of the company’s market cap is just the cash on the balance sheet. However, the company has been extremely cheap for almost a decade, and could very well represent a value trap. Investors will have to dig into the company to decide for themselves.


    AWX was spun out of American Waste Services on June 17, 1998. It consisted of an 18 hole golf course, Avalon Lakes in Warren Ohio, and a waste disposal / landfill management business. In 2003, the company entered into a lease to manage another golf course, Squaw Creek, and in 2006 the company purchased another golf course, Sharon Country Club. Waste disposal accounts for 75-80% of the company’s revenue and golf 25-30%.


    There is the potential for a lot of value in the golf segment. They own 5.6 acres in their Warren property (plus clubhouse, restaurant, pro shop, etc.) and 130 acres at their Sharon property. While I have no particular insights into the value of the land, the fact that they own that much land, plus their cash holdings, gives the stock some downside protection in the form of hard assets.


    In fiscal 2005-2009, the company earned 0.1, 0.35, 0.38, 0.19, and -0.2 per share. This year, results will come in slightly ahead of last year’s loss. So this is a company that can be profitable. However, what I really like about the idea is the profitability of the waste management division is being hidden by the red ink generated by the golf courses and corporate overhead. The waste mgmt division earned $2.2m before taxes in 2009 and 3.6m before taxes in 2008, and has earned just under $2mm in the first nine months of 2010 (vs just under 1600m in the first nine months of 2009). Assuming the WM division can earn $2.5m pretax this year, the company as a whole would trade at 4 times pre tax WM earnings and, on an EV basis, under 3 times WM pretax earnings. Note that, at the time of the spinoff in 1998, the value of the WM division was estimated at at least $15mm.


    However, the profitability of the waste management division is offset by the golf courses and huge corporate overhead. The golf courses pre tax loss ran 0.8m in 2009 and 0.4m in 2008, and have lost $435k in the first nine months this year (vs 500k in the same period last year). Corporate expenses ran 2.3m in 2009 and 2.5m in 2008, and have run 2.1m in the first nine months of this year (versus 1.75m in the same period last year). So the profitability of the core WM division is more than overrun by losses from the corporate and golf courses.


    I find this often happens with small caps, where the whole company appears to be trading on a slightly cheap valuation to earnings, but a deeper look reveals one profitable division and one losing money division (for example, see GAXC, one of my favorite ideas right now)


    Here's where my two questions about the company come up- where can value be created in this situation? and is the WM business profitable, or would corporate overhead eat all of the profits up if it was a single division? I suspect WM business would be very profitable on its own, as I suspect the golf business is the vast majority of corporate costs. Here is a breakdown of the company's assets by division – WM = 10.7m, golf = 31m, corp = 39.6m. Total = 81.2m intersegment assets = -34.2m net assets = 47.1m To me, it seems clear that almost all of the corporate assets are golf assets, which likely makes most of the corporate expense golf expenses.


    It’s my believe that the golf course segment will never be able to earn a decent ROIC. Personally, I'd like to see the chairman buy the golf assets from the company (I think they are his baby and he'll never be rid of them... as such, he should take them on as personal investments), and then use the proceeds from the golf sale to fund growth / acquisitions for the WM division.


    There are, however, plenty of negatives to this name. The company’s CEO suddenly resigned and was replaced by the chairman (the market actually liked this move, sending the shares a couple of percent higher). This same chairman has owns 66% of the voting control of the stock through a dual class agreement, and under his watch (he has been chairman since the spinoff, and CEO for most of the company’s history) the company has undergone significant value destruction. The company is also still on the prowl for acquisitions, despite their horrendous acquisition record. Specifically, the company is considering acquiring another golf course in Northest Ohio, where several clubs are experiencing difficulties. When your own golf courses are experiencing difficulties, have always experienced difficults, and are sucking up capital from a profitable and successful WM business, maybe it's not the best idea to go looking for more of them. I like this name, and I think there could be a ton of assets that, if managed properly, could send this name higher. However, I really think this is the dreaded "value trap". Mgmt has had over a decade to shut down the golf assets or sell them off and focus on the Waste Mgmt division, but they keep investing in them and buying new courses. I'd like to recommend this name, but I'm forced to stay away.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Long GAXC
    Tags: AWX
    Jan 14 10:29 PM | Link | Comment!
  • SMID- murky outlook creates oppurtunity

    Smith Midland is a micro cap that creates precast concrete products for the construction, utilities, and farming industries. They sell their products to general contractors and government transportation authorities (primarily in the Mid-Atlantic, Northeast, and Midwest). Key products include Slenderwall, an exterior wall panel, J-J Hooks, a highway safety barrier, Sierra Wall, a roadside sound barrier, and Easi-Set, transportable concrete buildings.

    The company has actually produced strong operating results throughout the recession. Sales have remained stable, and gross margins have actually increased. However, the stock price has remained depressed, most likely because of a murky future outlook for highway construction and other government spending, which SMID is dependent on.


    Excluding ~785k of charges related to a lawsuit settled in 2008, operating income has averaged just under $2.5m for the past three years, and should come in over $3.5m this year. Pre tax ROIC has been excellent as well, averaging ~20%. With the company trading an EV of 10.1m, they are currently trading at 3 to 4x EBIT and 80% of book value of 2.24 per share.


    While the cheap valuation is nice, an investment is not without risks. The business is notoriously cyclical and competitive, and ongoing state and federal budget cuts could cut into their customer base. The company is also tightly controlled, with a father and son team running the company and, together, controlling just short of 20% of the voting power. There are also a lot of options outstanding (594k, or well over 10% of shares outstanding), with strike prices varying closely around today’s price.


    However, for an investor comfortable with the risks, the business is being offered at an incredible valuation. I thought this quote from the company's 2009 annual report was very telling "The company's valance sheet and earnings per share are strong, and at the current stock price of approximately $1.38, we believe the Company's stock is significantly undervalued at this time." While the company has run up a bit since he wrote that, it has pretty much tracked the market in the time. With the company's balance sheet continue to strengthen and profit growth accelerating, I think the company makes a strong value investment candidate at today's prices.


    Disclosure- long SMID

    Disclosure: I am long OTCPK:SMID.
    Tags: SMID
    Jan 13 5:18 PM | Link | Comment!
  • EVI- A low risk play for a rocky market

    Envirostar is currently selling for about the value of its net current assets. Most of the assets are very liquid (mainly cash); in addition, the company has a relatively recession resistant and modestly profitable business. While this company is never going to experience tremendous growth, an investor at today’s prices has very little downside risk and significant upside potential.

    What do they do?

    Envirostar sells commercial and industrial dry cleaning equipment in the United States, the Carribean, and Latin America. The company’s primary domestic market is in the state of Florida. The company’s products range in price from $5,000 to $400,000.

    Do they have a moat?

    No, this is a completely average company. What is nice is they are relatively recession resistant. While their earnings have declined during the past two years, they have remained consistently profitable throughout the crisis.


    Quick note- I thought it was funny the company listed “Not Applicable” under risks factors on their annual report.

    While I don’t quite agree with that there are no risks, I don’t see too many risks to this business. The biggest risks would be a competitor coming in and aggressively trying to take market share with predatory like pricing, but the business is such a commodity business and so fragmented that I don’t see a real risk of that happening.

    The biggest risk to an investor today is the company is dominated by the Steiner family. They act as the chairmen and CEO of the company, and own 62% of the voting shares. They could take the company in any direction, including some shareholder value destroying ones, without shareholders being able to put up much of a fight. However, investors can take solace in the fact the company has been slowly building up their cash balance for years and I have seen no indications that they have any plans on foolishly spending their cash.

    Another risk is that the company is very quiet. While they do make all the proper disclosures, they tend to make the bare minimum. They don’t make presentations or go out promoting their stock or the business. While I like non-promotional management, it is difficult to get much information on the company.


    The company is currently trading for around $1.05. By my calculations, they have excess cash (cash minus debt minus (CL – CA if CL>CA) of $0.81 per share, so they trade for about $0.24 per share after stripping out excess cash. On a TTM basis, they’ve earned $0.03 per share. That gives them a P/E of less than 8 after stripping out excess cash. However, their earnings have been depressed by the slowing economy. For the seven fiscal years 2003-2009, they earned between $0.07 and $0.13 per share each year with an average ROE just under 11% (after stripping out excess cash, their average ROE was just under 17%).


    I don’t see any catalysts on the horizon. Management could begin a share buyback program or a dividend policy to help unlock value. Alternatively, they could perform a management buyout to purchase the 1/3 of the company they don’t already own. Given their small size and rather limited liquidity, they could also delist the company, which would save a substantial amount of auditing and compliance costs but would further decrease liquidity. However, I don’t view any of these as likely. An investor today will likely just have to wait for the market to realize EVI’s value.

    Price Target

    I have a price target of $1.51 on EVI. I arrived at this number by applying a multiple of ten to $0.07, the lowest amount they earned over the past seven years, and adding the $0.81 of excess cash they have. What I like about this investment is the very limited downside given the large cash balance and relatively recession resistant business.

    Disclosure: No position- however, I may purchase shares at any time
    Tags: EVI, long, small cap
    May 26 5:41 PM | Link | Comment!
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