Coast Distribution ($CRV)- a true Ben Graham net-net
Coast Distribution is, as you might imagine, a distribution company. They distribute parts for RVs and boats to 15k customers (mainly RV and boat dealers) throughout America and Canada. While it’s possible for a distributor to get a competitive advantage (AEY, for example, may have one), there’s no question that CRV does NOT have one. Gross margins are consistently in the mid-teens, and, despite a decent bit of leverage, ROE barely reaches the double digits during their best years. This is, at best, a commodity business, and possibly even worse than that!!!
However, that doesn’t mean they’re a terrible investment. The company trades for a huge discount to its asset value, and the company has managed to turn a profit in most years.
Let’s start with the asset situation, because it’s certainly the reason to be interested. CRV has tangible book value over $6.50 per share and NCAV of ~$5.70 per share. W/ today’s stock price at ~$2.40, CRV trades for well under 50% of NCAV. A true Ben Graham net-net!
Now, it’s true that this is a bit different than most of the net-net stocks I talk about. The company finances some of its inventory w/ debt (debt ~= 20% of assets), while most net-nets I talk about will be debt free. Given the low returns earned by the company and the relatively long life of the inventory they’re financing, I think borrowing against the inventory makes sense from a business perspective, but it certainly adds a bit of risk here.
From an income statement valuation perspective, I think the company looks interesting as well. On an EV / Sales basis, CRV trades for well under 0.15x. Granted, this is a low margin business which deserves to trade for a low sales multiple, but that does tell you that there is a lot of room for stock price appreciation if the company can slightly boost their margins.
The company also looks cheap compared to potential earnings power. In the middle of the 2000′s, CRV was consistently posting operating income in the $6-9m range on revenues of $150-200m. Given its current EV of $15m, if CRV can approach those earnings levels again, the stock would skyrocket.
However, there are some concerns.
Mainly, profitability. As I’ve mentioned, the company barely earns its cost of capital even in the best of times. Some stocks simply deserve to sell below book value because they will never earn their cost of capital (perennial net-net DUCK comes to mind), and CRV may belong there.
Speaking of profitability, it’s way down YoY- from $3.2m in the first nine months last year to $1.3m in the first nine this year, and there are some really concerning aspects to that. Sales are basically flat (down under 2%), so all of that drop has come from pure margin contraction. In addition, inventory is up 3-4% YoY despite a 2% drop in sales. Those aren’t good signs for a business’s health!
There’s also a bit of concern in the “fine print“. Reserve for obsolete and slow moving (slow moving is much more of a concern, IMO) inventory has traditionally ended the year at ~7-8% (it was 7.8% of inventories at year end in both 2009 and 2010). However, despite the uptick in inventory YoY, reserves for inventory are way down YoY- from 6.5% of inventory last year to under 4.9% this year. If CRV had held reserves steady YoY, it would have resulted in a further drop in operating income of $450k, or almost 1/3 of their reported operating income this year!
Overall, the last two concerns are somewhat nit-picky for a stock trading for under 50% of NCAV. The first concern- will they ever be able to consistently earn their cost of capital- is what will really make or break this investment.
Personally, I don’t think they’ll be able to, and I’m staying away from the company. But if you have a different take, or you’re just throwing together a net-net basket, then CRV makes for a very, very attractive investment at today’s levels.
Disclosure- Long AEY.