As part of my on-going quest to find the most obscure and deeply undervalued stocks out there, I’ve started combing through a list of all the stocks on the pinksheets (you can find the list I’m going through here). My previous experience going through random pink sheets stocks (which I mentioned a bit here and led me to Meritage (MHGU)) has revealed that for every 100 stocks you go through, ~90 are trash and immediate passes. 5 of the remaining 10 will be tossed within two minutes of looking at them. Of the remaining 5, probably 2 will be too risky, 2 will be interesting but not cheap, and the last one will be worth considering an investment in. Those are rough estimates, but it feels about right for the percentages when digging into completely random pink sheet stocks.
So imagine my surprise when the very first stock I looked at turned out to be interesting! And while I’m passing on the stock for now (for reasons I will discuss below), it was interesting enough that I thought I’d bring it up to readers.
The stock is American Biltrate (ABLT, Financial). What quickly jumped out to me was the massive amount of assets the market is offering up with this stock- tangible book value per share comes in over $14 per share versus today’s price just over $4.
There were a couple of other things to like about the stock as well. Insider ownership is well over 50%- I love to see high insider ownership in my microcap stocks.
Plus, the company has a large asbestos related liability on its books. This may seem like a bad thing, but the company seems basically fully insured for the liability- so it’s possible investors are staying away from the company in fear of a liability that doesn’t actually exist!
More importantly, the company may be more profitable than it appears on first glance. An initial look at ABLT shows a basically break even operation.
However, ABLT is made up of three divisions, and it turns out that the on-going losses at one division are off-setting strong profits at the other two.Their tape products division lost $660k last year (2010) and $2.5m in the first nine months of 2011. Meanwhile, their Canadian division generated $1.6m in profit last year and $1.8m profit so far this year! Finally, their jewelry division generated $3.5m in profits in 2010 and is basically break even for the first nine months of 2011- note that while jewelry profits are down this year, about half of 2010”²s profits were generated in their last quarter, so jewelry could still turn in a nice profit this year.
In other words, the company would be showing trailing operating profit in the $4-5m range if it simply shut the tape business down.
And profit would likely increase dramatically if the economy turned further- the jewelry segment in particular is (obviously) very economically sensitive, and its current profits are a fraction of what they were earning early last decade. For comparison, the jewelry segment consistently had revenues of of ~$75m (50% higher than today’s levels) and EBIT between $5-7m (double or more today’s level) from 2002-2004.
However, despite ABLT’s huge discount to book value and big profit leverage to a potential economic recovery, I’m currently staying away.
Why?
Two reasons.
First, the vast majority of the company’s assets are in accounts receivable, inventory, and PP&E- not cash. While I don’t necessarily mind this, those are the assets whose values tends to shrink the fastest in a liquidation / run off scenario. When you combine that with ABLT’s low cash levels, moderate debt levels, and large looming debt payments in the next twelve months, I think there is a small possibility of a liquidity issue that could evaporate a margin of safety. Likely? No. But I’d rather have basically no leverage when I invest in asset plays / net nets.
Second, I have to question management’s capital allocation. The tape division has consistently generated losses and, even in the best year I can find for it in the past ten years (admittedly, I’m only doing a quick glance through) barely earned 10% pre-tax ROA. That’s the best year in ten years! Every other year has been break even or, in the past five years, a huge loss! And yet management continues to invest money in it.
They had a similar issue with their old flooring division, a hugely cyclical business which generated ~3% ROA in its absolute best year but consistently huge losses in most years, yet management continued to prop the division up. Finally the division went so negative that management had to shut it down and turn it over to creditors a few years ago, but this problem of feeding one divisions profits into consistently money losing divisions seems all too prevalent.
So I’m passing for now. But don’t take my criticism wrong- there certainly could be value here. If you threw together a basket of 15-20 stocks exactly like ABLT, I’d bet you’d do extremely well in the long run.
But I think some of my current net nets (UUU, ASFI, and GTSI, for example) offer similar upside with much less leverage and more downside protection. So I’m holding a basket of them instead!
Disclosure- Long UUU, ASFI, and GTSI.
So imagine my surprise when the very first stock I looked at turned out to be interesting! And while I’m passing on the stock for now (for reasons I will discuss below), it was interesting enough that I thought I’d bring it up to readers.
The stock is American Biltrate (ABLT, Financial). What quickly jumped out to me was the massive amount of assets the market is offering up with this stock- tangible book value per share comes in over $14 per share versus today’s price just over $4.
There were a couple of other things to like about the stock as well. Insider ownership is well over 50%- I love to see high insider ownership in my microcap stocks.
Plus, the company has a large asbestos related liability on its books. This may seem like a bad thing, but the company seems basically fully insured for the liability- so it’s possible investors are staying away from the company in fear of a liability that doesn’t actually exist!
More importantly, the company may be more profitable than it appears on first glance. An initial look at ABLT shows a basically break even operation.
However, ABLT is made up of three divisions, and it turns out that the on-going losses at one division are off-setting strong profits at the other two.Their tape products division lost $660k last year (2010) and $2.5m in the first nine months of 2011. Meanwhile, their Canadian division generated $1.6m in profit last year and $1.8m profit so far this year! Finally, their jewelry division generated $3.5m in profits in 2010 and is basically break even for the first nine months of 2011- note that while jewelry profits are down this year, about half of 2010”²s profits were generated in their last quarter, so jewelry could still turn in a nice profit this year.
In other words, the company would be showing trailing operating profit in the $4-5m range if it simply shut the tape business down.
And profit would likely increase dramatically if the economy turned further- the jewelry segment in particular is (obviously) very economically sensitive, and its current profits are a fraction of what they were earning early last decade. For comparison, the jewelry segment consistently had revenues of of ~$75m (50% higher than today’s levels) and EBIT between $5-7m (double or more today’s level) from 2002-2004.
However, despite ABLT’s huge discount to book value and big profit leverage to a potential economic recovery, I’m currently staying away.
Why?
Two reasons.
First, the vast majority of the company’s assets are in accounts receivable, inventory, and PP&E- not cash. While I don’t necessarily mind this, those are the assets whose values tends to shrink the fastest in a liquidation / run off scenario. When you combine that with ABLT’s low cash levels, moderate debt levels, and large looming debt payments in the next twelve months, I think there is a small possibility of a liquidity issue that could evaporate a margin of safety. Likely? No. But I’d rather have basically no leverage when I invest in asset plays / net nets.
Second, I have to question management’s capital allocation. The tape division has consistently generated losses and, even in the best year I can find for it in the past ten years (admittedly, I’m only doing a quick glance through) barely earned 10% pre-tax ROA. That’s the best year in ten years! Every other year has been break even or, in the past five years, a huge loss! And yet management continues to invest money in it.
They had a similar issue with their old flooring division, a hugely cyclical business which generated ~3% ROA in its absolute best year but consistently huge losses in most years, yet management continued to prop the division up. Finally the division went so negative that management had to shut it down and turn it over to creditors a few years ago, but this problem of feeding one divisions profits into consistently money losing divisions seems all too prevalent.
So I’m passing for now. But don’t take my criticism wrong- there certainly could be value here. If you threw together a basket of 15-20 stocks exactly like ABLT, I’d bet you’d do extremely well in the long run.
But I think some of my current net nets (UUU, ASFI, and GTSI, for example) offer similar upside with much less leverage and more downside protection. So I’m holding a basket of them instead!
Disclosure- Long UUU, ASFI, and GTSI.
