ADDvantage Technologies Group (NASDAQ: AEY) is a microcap nationwide distributor of cable television and fiber optic communications equipment. AEY maintains one of the industry's largest inventories of new and refurbished equipment, allowing them to deliver a wide range of products with a short lead time. ADDvantage additionally takes advantage (hence the name!) of its multiple cable system operator and equipment OEM relationships to buy, sell, and refurbish used equipment and sell it on at a profit to expanding cable operators throughout Latin America.
Earnings Valuation and Outlook
With the recent economic doldrums depressing cable equipment demand, AEY weathered the downturn well, posting positive net income of $0.64, $0.44 and $0.30 per share in fiscal years 2007-2009 respectively. Current valuations represent an attractive 4.59 P/E to recent baseline earnings of FY2007, and a reasonable 9.73 multiple to trough earnings of FY2009. But the equipment upgrade cycle cannot be postponed indefinitely - in fact, AEY is currently beginning to experience an earnings turnaround that has yet to be baked into the stock price, with sales in the latest quarter showing growth of 45% year-over-year, and fully diluted net income reaching $0.14 per share, already representing a 5.25 run-rate P/E. In the recent quarterly comments management was "cautiously optimistic regarding consumer trends" but noted that large and small cable systems have continued to delay making significant upgrades, implying eventual further upside from recent levels of profitability should a major upgrade cycle begin in earnest.
Inventory Writedowns and Excess Cash Flow
In its capacity as a refurbisher and reseller of used cable equipment, ADDvantage recorded generous valuation allowances for inventory obsolescence as Latin American economies slowed over the past few years making resales more difficult. This resulted in recurring non-cash charges to reported earnings that recently ranged from 10% to 33% of the 2007-09 net income figures quoted above. However, as resale demand begins to pick up, AEY has now begun to generate significant cash in excess of GAAP earnings. Cash flow from operations for the trailing 12 months has totaled $8.935 million, almost a third of the current market cap. Although I'm not sure yet whether AEY may have truly over-reserved and by what extent, the depreciated equipment carried on the balance sheet could be an additional store of value that adds substantial operating leverage to any demand-side recovery. As a further sweetener, AEY has facilities on owned real estate totaling an aggregate 193,000 square feet, acquired at various times since the company's founding in the mid 1980s and likely carried on the balance sheet at significant discounts to current market value.
Trading at a discount to a reported book value that is likely understated based on both inventory and real estate, and at very cheap multiples to earnings and cash flow which are continuing to grow, I think ADDVantage is an appealing microcap value investment with attractive risk-reward.
Continued earnings recovery
Accumulation of excess cash flow
|Entry||09/03/2010 04:49 PM|
I own this one. Margins are higher for the older out of date stuff that is hard to find. New stuff that is more liquid has lower margins. Obsolete inventory becomes a risk on the older widgets, but these guys know their tv parts pretty well. (If I recall, the founder started off as a tv repairman in his teens). Margins are high because they are not a vanilla distributor, there is a fair amount of expertise in deciding what widgets to buy, how much, when, what price to pay, and why.
|Subject||sales / inventory|
|Entry||05/10/2011 01:26 PM|
Results out today. Was wondering if you had any sense of what their inventory levels should look like going forward giving Tulsat's new arrangement w Cisco and the reduced level of sales, in general.
|Subject||RE: sales / inventory|
|Entry||05/11/2011 09:02 PM|
Spending by cable MSOs has still been slow, though margins are holding up and cash is growing. Mgt is planning further inventory reductions by "a few million" by the end of the year but says this depends on demand going forward; I would think the new CSCO agreement would make them want to draw them down even more. They were vague and cryptic on the CC when asked about buybacks, saying they are "considering all opportunities in the marketplace."