Description
This is a small microcap idea with some complications, but I think the very low multiple to forward earnings is enough to make it of good potential interest to microcap investors. AMCON Distributing (AMEX: DIT) owns a regional wholesale consumer products distribution network principally serving convenience stores and small retailers in the Great Plains and Rocky Mountain regions of the United States, and also owns two smaller subsidiaries respectively engaged in health food retail and bottled water manufacturing. The significant earnings power of its profitable core distribution business has lately been obscured by recent reported losses and impairment charges at its unrelated bottled water manufacturing and health food retail subsidiaries. The company's current plans for a liquidation or sale of these non-core business units could eventually unlock a great deal of hidden value.
Amcon's annual revenues of over $1,230 per share compared to its current share price near $17 are remarkable even for a distribution firm with some debt. Interestingly, Amcon's distribution business alone generated pretax income in excess of $7.6 million in each of the last two fiscal years, a figure representing almost 85% of the entire firm's current $9 million in market capitalization. Operating losses and non-cash charges from the other businesses have recently been obscuring these earnings and resulting in negative EPS. For convenience I will post some data from income statements by business segment extracted from past 10-Ks. As you can appreciate, consistent operating income from the distribution business is being obscured by reported losses in retail, and especially beverage with its significant writeoffs of intangible assets.
Fortunately, the company is now preparing a liquidation of its non-core businesses that could soon restore focus to the significant value of the distribution business. Helped by pressure from their lender, management and the board (themselves large DIT shareholders who had previously enjoyed significant income from dividends) now finally appear to realize that venturing outside the core competency was unwise and intend to manage the existing profitable distribution business for cash flow and debt reduction going forward. The company has now placed all assets of its separately incorporated beverage and retail subsidiaries into a new entity named The Healthy Edge (THE) and is preparing the THE business units for liquidation or sale. One of the two bottled water companies (Trinity Springs) may be placed into bankruptcy liquidation; and after an unsuccessful search for third-party buyers DIT CEO William Wright has signed a letter of intent to purchase the remaining THE entity in a transaction monitored by independent board members. LaSalle Bank had wanted the sale to be complete by this month but is working with the company while it is being finalized in the coming quarter - going forward no further cash will pass from DIT to THE and the significant cash flows of the distribution business should be sufficient to service the facility. Although the retail segment in particular should have some value (it is currently EBIT positive) I am assuming a liquidation of all non-distribution businesses for $0.
What interested me in this idea is that based on the worst possible case of assumptions, taking the $8.3M in '04 operating income from distribution, subtracting the full $1.1M in interest expense from the distribution segment's debt and also assuming the entire $1.9M interest expense of THE-associated debt after liquidating THE for $0 in cash would still seem to get us to positive $5.3M pretax income on the current $9M market cap. The sale of THE may create a non-cash charge capable of sheltering the distribution firm's income for some period, but assuming a full tax bill of 33% would give net income of $3.5 million, a forward multiple of under 2.6 for this non-cyclical business with consistent profitability.
Of course, negatives include that the company in the past made such bad investments outside of their core business and is now forced to liquidate or unload them to the Chairman, creating potential conflicts of interest; and that the core company will be left with significant debt to pay down before again returning free cash flow to shareholders (until FY2004, DIT had consistently paid a $0.73 per share cash dividend). However, with $8 million plus in non-cyclical operating income the distribution business does have a substantial amount of real value that is being heavily discounted by the entire firm's current $8.7 million price. This is a leveraged but potentially highly rewarding investment; if management is successful in refocusing on the existing profitable business (as they are incentivized to do), current shareholders should be well rewarded in future.
AMCON DISTRIBUTING - FINANCIAL STATEMENTS BY SEGMENT
Wholesale
Distribution Retail Beverage Other/2/ Consolidated
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FISCAL YEAR ENDED 2004:
External revenues:
Cigarettes $ 597,310,736 $ - $ - $ - $ 597,310,736
Health food - 32,431,573 - - 32,431,573
Confectionery 55,641,415 - - - 55,641,415
Tobacco, beverage & other 131,901,800 - 4,480,065 - 136,381,865
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Total external revenues 784,853,951 32,431,573 4,480,065 - 821,765,589
Depreciation /1/ 1,121,873 765,371 306,499 - 2,193,743
Amortization 177,050 92,004 28,265 - 297,319
Operating income (loss) 8,340,023 90,133 (5,519,647) (256,664) 2,653,845
Interest expense 1,118,014 1,213,098 670,413 - 3,001,525
Income (loss) from continuing
operations before taxes 7,754,389 (1,099,671) (6,182,795) (243,064) 228,859
FISCAL YEAR ENDED 2003:
External revenues:
Cigarettes $ 564,804,865 $ - $ - $ - $ 564,804,865
Health food - 33,110,706 - - 33,110,706
Confectionery 51,400,977 - - - 51,400,977
Tobacco, beverage & other 119,310,355 - 3,166,353 - 122,476,708
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Total external revenues 735,516,197 33,110,706 3,166,353 - 771,793,256
Depreciation /1/ 1,192,146 750,071 186,191 - 2,128,408
Amortization 195,935 187,809 - - 383,744
Operating income (loss) 8,538,065 503,799 (1,597,662) (77,659) 7,366,543
Interest expense 1,397,631 1,384,295 412,313 - 3,194,239
Income (loss) from continuing
operations before taxes 7,645,028 (847,604) (2,056,992) (77,659) 4,662,773
FISCAL YEAR ENDED 2002:
External revenues:
Cigarettes $ 640,359,587 $ - $ - $ - $ 640,359,587
Health food - 31,655,388 - - 31,655,388
Confectionery 52,566,991 - - - 52,566,991
Tobacco, beverage & other 120,297,206 - 2,237,825 - 122,535,031
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Total external revenues 813,223,784 31,655,388 2,237,825 - 847,116,997
Depreciation /1/ 1,195,595 739,412 234,927 - 2,169,934
Amortization 394,150 749,774 139,410 - 1,283,334
Operating income (loss) 7,969,125 382,332 (1,201,310) - 7,150,147
Interest expense 2,786,389 1,265,678 220,716 - 4,272,783
Income (loss) from continuing
operations before taxes 5,677,906 (1,049,613) (1,245,217) - 3,383,076
/1/ Includes depreciation reported in cost of sales for beverage segment.
/2/ Includes charges to operations incurred by discontinued operations and intercompany eliminations.
Catalyst
Liquidation or sale of unprofitable non-core business units recovers the significant earnings power of the remaining firm