Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Butler National Corporation: A Cheap Nanocap

|About: Butler National Corporation (BUKS)
Summary

Butler National Corporation is a casino operator and has a airplane modification business.

Based on EV/EBIT and other value factors the company is extremely cheap. Moreover, at Butler we see buybacks, increased holding of insiders and purchases of a 10% shareholder.

The company tries to grow its airplane modification business, also through more international orders. A turnaround of this segment can easily double or triple total operating profit.

On Seeking Alpha Marketplace I share research on many net-nets, low EV/EBIT stocks, cheap momentum stocks, cheap nanocaps and falling knives. In total I provide research on global stocks from 6 quantitative investment strategies.

See also this free overview article for a more detailed description of 4 of these 6 investment strategies. You can get more information by taking a free trial of my marketplace newsletter here.

As part of my SA Marketplace research twice a month I rank global low EV/EBIT stocks on multiple criteria predicting high returns. This allows me to compare these cheap stocks systematically. In June/July 2018 a very cheap stock in the list was Butler National Corporation (OTCQB:BUKS). At the moment it is not any more in my quantitative list because trading liquidity decreased. Now liquidity is below the minimum to make it actionable for my subscribers.

On a statistical basis such stocks have extremely good returns, especially if trading liquidity falls below the minimum for my Marketplace research. That causes it to be even more under the radar. I have not been able to buy this one myself because so far there were better choices for me in other (international) stocks.

In the rest of this article I share basic findings and data. I have updated them from my marketplace research published in July 2018. In the table below the share price is in US dollars and numbers like the market cap and EBIT are in millions of dollars.

Butler National Corporation: nanocap with good multiples and buying from a 10% holder

Piotroski

Share Price

Market cap

EV/EBIT

P/Tan B

6

0.24

15.5

9.6

0.65

Enterprise

Value

EBIT, ttm

Cash flow 

from ops

Free cash

flow

P/FCF

20.4

2.1

6.3

4.0

3.9

Butler National Corporation has 2 business segments: management of casinos and aerospace products. The company manages 2 casinos: an Indian owned casino on Modoc Indian land and a state-owned casino in Dodge City, Kansas. The first casino does not significantly contribute to the revenue. Instead about 2/3 of the revenue comes from the state-owned casino in Kansas. This source or revenue is very stable. Over the last 9 months the casino segment produced a profit of $1.1 million. For some reason the revenue from this casino has been slowly decreasing over the last couple of years.

The remaining revenue, about a third, comes from the less profitable airplane/aerospace business. Though the company calls it the “legacy business” it still expects this segment to grow in future. The company prepares for a mandatory update of air traffic control systems in the US and many other countries through “development and certification of ADS-B systems”, before 2020. Since this business segment is running close to break-even a turnaround can quickly double or even triple operating profit.

A search on the company name and keyword “fraud” did not reveal any relevant links. This stock's 5-year low was about $0.11 and the 3-year low was $0.13.

The company has been somewhat dilutive during the last couple of years. In each of the book years ending on April 30, 2016 and 2017 the company issued about 1.2 million new shares. There are no stock options. Instead almost all of these shares were issued for the company’s 401 K plan. A few shares were issued in lieu of director compensation, to make directors holding more shares. That seems to work well: directors have not been selling. And there is also a buy-back program. Recently the company repurchased over 500,000 shares in a private transaction for $0.26 per share. This sounds promising to me.  However at the end of the year the share count was 66,196,854. This is still about 900,000 more shares than a year ago. 

Though the company trades over the counter it still reports with the SEC. See the annual report (April 30, 2018).

Leverage is low with Tangible Assets/Tangible Equity well 2. However most leverage is financial instead of operational. The book value of the liabilities is 12.2 million dollar including 3.35 million dollar of debt and promissory notes with a book value of 2.39 million dollar. This is mostly offset by a cash balance of 7.35 million dollar and a current ratio of about 1.5. My conclusion is that there is no financial distress at Butler National Corporation.

Retained earnings are 10.1 million dollar. Therefore Market cap/Retained Earnings = 1.53, which is pretty good. Even better: most of these earnings are from the past 8 years. The company trades for a multiple of my estimate of the liquidation value.

My screener (table above) underestimates the ratio P/Tangible Book. In reality the company trades roughly at tangible book value. Among the intangible assets are contracts to operate casinos and capitalized development costs converted into “supplemental type certificates”. Such certificates are licenses to make specific modifications in existing airplanes. Because of new regulations often old planes need new equipment. Such modifications apparently need to be approved by the US government and hence those licenses for specific modifications.

Substantial shareholders: outsider Joseph P. Daly 10.3%, director R. Warren Wagoner 6.4%, the CEO Clark D. Stewart 5.7%, manager Craig D. Stewart 2.4%, director David B. Hayden 2.1%, manager Christopher J. Reedy 1.9%. Also the CFO owns some shares.

Included in the stakes mentioned above are recent share purchases for the 401 K plans of insiders and from Joseph P. Daly. These pruchases must have driven up the stock price by 20% since I shared this statistical pick with my subscribers.

Become a statistical investor. Investing is mostly a game of luck. Therefore it is dangerous to invest based on conviction with large positions. But investing with many small positions in undervalued stocks with statistically great returns works just as well. So that is what I do.

Join me: take a subscription to my newsletter on SeekingAlpha.

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