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Adams Resources: Snapback Rally Moves The Focus Back To Management

Jun. 04, 2020 10:46 AM ETAdams Resources & Energy, Inc. (AE)5 Comments
Vince Martin profile picture
Vince Martin


  • AE rebounded quickly from March lows after briefly dipping well below its cash balance.
  • The balance sheet took a hit in Q1; combined with the rally, that has returned valuation to more normalized levels.
  • But a small acquisition highlights an increasing sense that Adams is becoming a much more shareholder-friendly company.
  • There's still value here to be realized, and a management team that seems intent on trying to realize it.

When I recommended (and bought) Adams Resources (NYSE:AE) in March, the case for the stock was relatively simple. Adams Resources finished 2019 with $26.88 per share in cash - and no debt. At March lows, Adams Resources stock traded below $17.

There were some potential complications. For several reasons, the cash balance didn't necessarily have to provide a floor under AE stock. Thanks to the oil rout in March following the Saudi Arabia-initiated price war, Adams faced potentially significant inventory valuation losses in the first quarter, and demand pressure going forward.

But the margin of safety seemed thick enough - and apparently, I wasn't the only investor to think so. AE stock posted a remarkably quick snapback rally. A recent fade leaves the stock still below 2019 levels, and -30% YTD. But the gains in Adams stock since March, along with pressure on the balance sheet in Q1, at least return valuation to levels that appear more normal in a historical context.

That suggests that the easy money probably has been made. But there still is an interesting bull case going forward, particularly with a modest fade over the past three weeks. AE isn't nearly as compelling at $27 as it was at $17, but if a new management team maintains a relatively new focus on shareholder value, there's the potential for more upside ahead.

Normalcy Returns to the Valuation

After Q1 results last month, AE stock still looks awfully cheap. Unrestricted cash per share is near $21. And the company generated adjusted earnings per share of $1.81 in the first quarter alone.

But for a number of reasons, AE stock historically has been reasonably cheap. What was notable about March levels is how extreme the valuation was even in that context. In early June, the fundamentals appear much more in line:

This article was written by

Vince Martin profile picture
Overlooked Alpha launched April 2022 - subscribe at overlookedalpha.com. Some OA articles are also available here at Seeking Alpha.I've been contributing to Seeking Alpha and other investment websites since 2011, with a general (though far from rigid) focus on value over growth. I got my Series 7 and 63 back in 1999, and watched the dot-com bubble peak and then burst in real time at a small, tech-focused retail brokerage in NYC.

Analyst’s Disclosure: I am/we are long AE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I may exit or trim my position without notice.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (5)

Thank you for the article.

What do you make of the 60M shelf offering?
Vince Martin profile picture
Not that much just yet. I think it goes to the broad change in the story here, where they're clearly interested in actually trying to grow this business. The pipeline deal is another sign. So at the least I think it's clear that the strategy has changed. The question now becomes whether that strategy will work.

TBH, I need to take another close look to understand how the last couple of quarters have gone and where they're positioned, so I'm not quite ready to speak to early thoughts on the likelihood of success. But this is a stock that always had the mother of all catalyst problems and now, at least, that's no longer the case. Of course, the trade-off is that the 'floor' under the stock isn't nearly as solid, either.
user888 profile picture
I hope management understands that issuing equity at prices below book value decreases per share business value. I appreciate that there may be lots of good assets available at distressed prices within the energy/related transportation space at the moment, but I think I would prefer debt funding over potential value destruction via equity dilution below book. Looks like they funded the recent pipeline acquisition with a trickle of financing with the seller. The debt free balance sheet has always been a primary appeal to me for AE, but not at the expense of dilutive equity issuance.
user888 profile picture
Also, despite finally having a stock-based comp program in place, the C suite needs to own more stock. The open market purchases have been too small to signal real conviction in the prospects of the business
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