Is Avalon Holdings Really Undervalued?

Gisli Eyland profile picture
Gisli Eyland

I initially read about Avalon Holdings (NYSE:AWX) here and here. Although the company has a history of low returns on investment/equity/assets, it seems to be undervalued as its shares trade at a market prices more than 1/3 of its book value.

Is the low price to book ratio caused by negative industry outlook?

This waste management industry screening gives us the following facts:

  • AWX is by far the smallest (publicly traded) company in this category. Its market capitalization is 7 times smaller than that of the second smallest in the screening.
  • AWX has the lowest Price-to-Sales (0.31) and Price-to-Book (0.29) ratios and the second lowest Price-to-Free Cash Flow ratio (4.08)
  • The average Price-to-Book ratio is 2.71
  • Only one other company reported operating losses in the screening.

Conclusion: A negative industry outlook is not the reason for the low market value compared to book value per share of AWX.

Alternative reasons:

  • Slow growth rate (5Y annual avg. sales growth is 4.24% compared to 12.5% industry average)
  • Low profitability (note: the main source of losses comes from the golf operations)
  • The stock is very small and illiquid
  • Chairman and former CEO Ron Klingle has total voting power and therefore control over the company
  • Gross margin is very low (18.4%) compared to industry average (60.7%)

The company has $5.5M in cash and carries hardly any debt. Are investment opportunities likely to improve its profitability?

In the latest SEC 10-Q form, the management reports that:

The waste industry has been consolidating and continues to consolidate as a result of a number of factors, including the increasing costs and complexity associated with waste management operations, lower volumes, and regulatory compliance. Many small independent operators and municipalities lack the capital resources, management, operating skills and technical expertise necessary to operate effectively in such an environment. Avalon believes that this pressure will

This article was written by

Gisli Eyland profile picture
Fundamental Finance aficionado. Special interest in marketplace companies, exchanges and other "croupiers".Focus on software and travel industry.

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