Alliance One International (AOI) was originally written up by ecf191 on April 3, 2008. For description and background on the company, see ecf101’s well-written write-up. This is a follow-up write-up given recent price action and upcoming catalyst.
AOI is one of the cheapest and most compelling under-followed stocks out there in the small-cap arena. Only one sell-side broker covers the name. The near term catalyst is rapidly approaching – the company will be reporting earnings early part of November. In the low $3s, the stock is trading at 4.0x March 2009 fiscal year ending EPS, and has a 30%+ free cash flow yield! This compares to 7.5x PE for competitor Universal (UVV) and 10.0x+ PE for the tobacco manufacturers. The company will generate massive amounts of cash over the next few quarters and will use it to continue to deleverage.
However, the near term catalyst that will drive the stock is the upcoming September ending quarter earnings announcement. There are number of reasons to believe earnings are going to hit record levels this quarter and therefore see the stock perform extremely well. This is a name that moves, and moves big when both sales and earnings are growing year-over-year. This is a quant-hedge fund favorite, and when certain key metrics are growing (esp. sales and earnings), there will be immense upward technical pressure, especially given where the stock is today in the low $3s. Every quarter that the company has shown growth on both sales and earnings, the stock has been up over 50% in a matter of weeks. Given how much the stock has gotten crushed along with the general market, I expect the stock to move even higher than it has historically when reporting a good quarter. The stock could easily more than double within a few weeks if the quarter comes in as I expect.
This company is recession-resistant from a fundamental standpoint. It is directly tied to global cigarette volumes and consumption (not just U.S. consumption volume). See Philip Morris International (PM) earnings results today. PM posted strong results today, beating estimates for the quarter and reaffirming guidance. Global volumes are strong. In addition, combine that with the fact that global tobacco leaf supply / demand is tight (AOI's business; good for pricing),
and you have very good dynamics for strong performance for the upcoming quarter.
I believe AOI is going to have the best quarter in its history since the merger with the #3 competitor in 2005. It is going to be a historical record in terms of sales AND earnings. Any time this has happened, the stock has done extremely well. I believe sales will come in at around 700 mm+ and earnings at .45 cents or greater for the quarter ending September 2008. This would imply a year-over-year growth of 23% and earnings growth of 131%. Even if I am off by a lot (I actually think my numbers have conservatism built in), the company will show very strong numbers. My numbers are not based on anything fancy. If you lay out the past eight historical quarters, and listen to the conference call for the assumptions, which are again very reasonable (pricing, volume, gross margins, etc.), you will get to my forecasted estimates. If you want to see my one page excel spreadsheet that highlights this email me and I will send it to you. Also, if you plot a historical stock graph versus sales and earnings year over year growth on a quarterly basis, you will see why this stock is so compelling.
Also, a weak Brazilian currency (Brazilian Real) is extremely good for the company (it has been negatively plaguing company past two years). The weakenss of the Braziian Real (currency) is a huge positive for AOI. The strength of the real has plagued the company for the past few years, but all that's reversing. If the Brazilian real stays where it is at around the 2.15+ levels, this should add another 40 cents plus of EPS to full year EPS for next year.
For fiscal year March 2009 I am estimating 75 cents plus for EPS. So assuming, no other growth, and assuming Brazilian real stays around here, I would expect $1.15 of EPs for March 2010!
Here is the summary of the major points on the stock:
- Recession resistant business fundamentally (tied to GLOBAL cigarette volumes and overall health of the GLOBAL cigarett industry, which is doing great right now)
- Only two global tobacco leaf (AOI's business) players - Alliance one (AOI) and Universal (UVV) - each with about 50% market share
- Tight supply / demand conditions for tobacco leaf currently - great for pricing for AOI
- Tobacco leaf costs are very small percentage of costs for global tobacco manufacturers
- AOI has paid down / reduced net debt by $400 mm since merger with #3 player in 2005 and continues to do so
- AOI has leverage but no issues or concerns. Credit lines have not been drawn and are available for next few years. Long term debt not due until 2012. All other debt are asset backed by inventory and receivables
- Cheap on both absolute and relative basis. Trading at 4.0x PE and 3.5X free cash flow. Half the valuation of competitor Universal (UVV. Also, trading at massive discount to tobacco manufacturers
- Upcoming quarter seasonally strong and also should be record for company in terms of sales and earnings. Free cash flow generation will also be very strong. Delayed shipments from last quarter will flow through this quarter as well.
- Trading wise - this is at historical low even though the company is at it's strong position ever since the merger with much less leverage. Look at chart. This is all time-historical low even though fundamentally very strong.
- Buy stock here and start selling at $8. Once earnings season is over, people will start focusing on companies like this where extremely cheap but also growing sales and earnings.
Catalyst
Upcoming earnings call for quarter ending Sept 2008 in early part of November