Advent Wireless - a huge bargain, or Canadian value trap?
Anyway, Advent is a wireless retailer based in Canada. They’re very small (25 stores) but extremely profitable- trailing EBIT comes in over $2.3m versus invested capital (after excluding excess cash) of ~$1.5-2.0m. Obviously, that’s insanely, insanely good.
Advent is also a bit different than most of the companies I’ve mentioned in they are Canadian (as is one of the last stocks I mentioned, Urbana). As such, you can’t find Advent’s financials on EDGAR; instead, you need to go to CEDAR or follow this link for Advent’s filings.
So here we have a micro-cap company generating outstanding returns in a market that is (likely) significantly less picked over than the U.S. market. Add it up, and all the flags are obviously screaming “Possible value candidate!”
And Advent certainly looks cheap. Book value sits just under $1.00 per share, slightly below today’s share price, and the bulk of it consists of cash- 70% of their assets are cash. EV currently sits at ~$2m, meaning the company is trading for less than 1x EBIT.
Even better, the company is growing. Sales are up over 10% in the first nine months of this year compared to last, though earnings are flat due to increased marketing spend.
So, the company obviously appears cheap and it’s growing within its very profitable niche. So why have I chosen to pass so far?
Basically, it’s all about risk. The company is completely dependent on their contract with Rogers, Canada’s largest wireless provider. If Rogers ever chose to shut Advent out, Advent would be dead in a day. It wouldn’t be the worst loss ever, as a liquidation would likely return a good bit of the share price to today’s shareholder, but it would certainly be a swift and solid capital loss.
Then there’s the risk that there’s no secret sauce in retailing. Retail is a commodity business with low barriers to entry. Anyone can do it. Every time I’ve invested in one with high ROIC that seemed cheap on an earnings basis, I’ve been burned (i’m looking at you, radioshack and aeropostale).
So, if there is no secret sauce, why is Advent earning such high ROIC? Why haven’t competitors and/or Rogers taken all of that excess ROIC from them? If they did, Advent’s earnings would drop in a hurry, and the stock would actually look a bit expensive at today’s levels.. And there’s already signs of that happpening. Mgmt mentions increasing competition in their most recent letters, and the higher marketing costs could be a sign of the increasing competition and Rogers demanding more from them. Of course, it’s also partly a function of growing their store base.
Finally, I’m just so concerned about the consumer electronics business model. There’s a reason Radioshack and Best Buy trade for under 3x EV / EBITDA- online retailers are just eating their lunch. Why couldn’t the same happen to Advent and knock down their ROIC significantly?
Overall, I think Advent is a very interesting stock. For those with a grasp of Canadian retailing and a better handle on the business model risks against online retailing, I think there could be a ton of value here. But after I got burned by Radioshack last year on a similar thesis (though, admittedly, this one is cheaper and cash heavier), I’m staying on the sidelines for this one.
Disclosure- Long URB, RSH calls