Description

Introduction

AutoInfo Inc. (OTCBB: AUTO) is a small non-asset based transportation company headquartered in Boca Raton, Florida. According to Transport Topics, the company’s Sunteck Transport Group subsidiary is the 8^th largest freight brokerage firm. The small, under-appreciated company seems to be mispriced by the market, especially given two large motivated financial owners that control a significant amount of the outstanding shares.

As a non-asset based company, the company does not own the transportation assets, but rather operates a network uniting customers in need of shipping services, sales agents and transportation capacity providers. Services offered to end customers are similar to other non-asset based providers and include a variety of transportation needs. Additionally, the company has a second segment that it has labeled “agent support services” that provide services to its network partners. This segment consists mostly of financial related services, including interest bearing loans for agents to grow their businesses and more recently sale / lease assistance for truck owners and operators. This segment will now see the company financing the purchase of trucks by new operators joining their network.

AutoInfo is, as yet, not traded on a national exchange and is certainly a small and relatively illiquid company. Average daily volume over the last three months is approximately 11,893 shares and over the last year the average daily volume is 28,803, though making an adjustment for the Baker Street purchase mentioned below, the average daily volume over the last 12 months approximates that of the last three months. Currently, the market cap is $25.6 mm and its enterprise value is $41.7 mm. In 2011 the company generated $320 mm in revenue and $3.6 mm in net income. It is trading at 7.5 x net income. [All of these figures reflect no adjustments for the recent acquisition and options which are discussed below.]

Together the owners above own 62.12% of the company. Kinderhook has been involved with AutoInfo since at least 2004 when it participated in a small private placement and purchased a convertible debenture which was converted into common stock. Later the company made additional open market purchases. The firm’s purchases appear to be in the range of $.33 to $.54 per share. In late 2011 Baker Street acquired the block that it now owns for $.55 per share.

One might surmise that given Kinderhook’s long involvement with the company and Baker Street’s recent activism, productive conversations regarding the company’s future direction and realization of intrinsic value may be ongoing. For reference, Baker Street has filed six 13D’s on US companies since early 2010, including at Tix Corporation (TIXC.PK) where the firm actually made a bid for the entire company and was later given board representation. It also participated in a tender offer in for Pyne Gould Corp. (NZSE: PGC). There have been no subsequent 13D filings by Baker Street after its initial filing in early November 2011.

Interestingly, the company disclosed in its recent 10-K filing the formation of a strategic initiatives committee. Here is the excerpt:

Our Board has an audit committee, a compensation committee and recently formed a special strategic initiatives committee…The strategic initiatives committee is responsible for working with management to evaluate strategic opportunities that may arise from time to time.. The committee is comprised of Mr. Patterson and Mr. Wachtel.

The current AutoInfo business really came into existence when Sunteck Transport merged into the public AutoInfo in 2000. Sunteck, in addition to the recently acquired Eleets Transport, remains the main operating entity. Since 2001 the current management team has grown the business (adjusted for the Eleets acquisition) from $8 mm in revenue and $.05 mm in operating income to $254 mm in revenue and $6.5 mm in operating income. Below is a chart showing the impressive record of growth, all on a per share basis, to account for dilution. Also provided is the growth in debt per share, given this important consideration.

The company performed fairly well, in my opinion, during the recent global financial crisis. Full year 2008 and 2009 revenue grew over the prior years, while operating profit did decline approximately 33% in 2009. By 2010 full year operating income surpassed the previous high water mark in 2008 by over 35%.

In 2011, AutoInfo acquired one of its large partners Eleets Transport. AutoInfo had essentially bankrolled Eleets growth over the last several years with loans and advances made through its agent support services segment. In exchange for the discharge of those debts, the company acquired that business in late 2011. This acquisition will impact reported results and comparisons for prior years, as the acquired business’s brokerage division was not included in the sale and so the associated revenues will no longer accrue to AUTO. However, no longer will the high commission rates AUTO paid the agent exist and so operating income is approximately comparable.

I present some comparable companies below, but there are key differences between those companies and AutoInfo, including of course size and diversity of services, but also business structure. With an average ROE of 35.2% since 2001 and a more recent 5 year ROE of 13.4%, I would classify AutoInfo as an average business. As a frame of reference the average ROE of the comparable companies provided below is currently 22.1% (inclusive of AutoInfo). Many of the comparable business are superior models that drive superior economics. Given the size of the company and that it is Bulletin Board company, I consider 13x net earnings (which might also be a reasonable expectation given the recent steps toward strategic initiatives) to be approximately the appropriate multiple which would put fair value closer to $1.10 on a fully diluted basis. I expect modest growth in 2012, perhaps on the order of 10% in terms in operating income growth. As adjusted for the Eleet acquisition the company grew revenue 44% and operating income by 8%. As a reminder, revenue in 2012 compared to unadjusted 2011 is likely to be down given the nature of the Eleets acquisition.

Options – The company has a significant amount of options outstanding at 12.31.12. 3.425 mm of these shares were granted in 2011. That represented approximately 10% of the shares outstanding at the end of the year. This deserves to be something that is followed closely. While 4.5 mm shares expired in 2010 at slightly higher prices than the shares issued in 2011, further dilution of this magnitude would not support the investment thesis. Management would suggest that some of these grants are more one-time in nature and others are more periodic in nature. We’ll continue to watch this quite closely.

Eleets Integration – The recent acquisition of Eleets should be a fairly simple transition given the company’s intimate knowledge of the business prior to the acquisition, however, unexpected complications would hinder the company’s progress at least over the shorter-term.

Advances and Support Services – The company had a total of $6.14 mm worth of advances and other assets related to this segment. While this is down considerably due to the Eleets acquisition, it still represents a significant commitment of capital for AutoInfo. Deterioration of the businesses of its agents has the potential to impair this value. These are typically small businesses, with repayments dependent on the agent successfully operating its business. The fact that AutoInfo sits in the payment stream helps mitigate this risk, but does not eliminate it.

Receivables – It is important to keep an eye on the progression of the company’s receivables, which the company’s credit facility is primarily supporting. DSO’s at approximately 58 days at 12.31.12 were in-line with the 10 year average of 58.5 days.

For those new to the industry or those with a casual interest it might be instructive to follow XPO Logistics, now run by Bradley Jacobs who made a splash in this business last year with investment into that company. An interesting read is: http://sec.gov/Archives/edgar/data/1166003/000095012311069724/k50546dadefa14a.htm

AutoInfo Inc. appears to be an attractive business trading well below its intrinsic value, with significant insider and financial ownership. The company has a long history of growth in a still fragmented market that has a long runway for future growth. It may also be an attractive acquisition target, in part with the support of its concentrated financial oriented owners.

Catalyst