My Walker’s Manual is the 1999 edition and Abatix is only the 8th stock listed in the book. This makes a nice change from the usual indices which I search through when it usually takes much longer to find a sub book value or sub working capital stock.
ABIX, based in Mesquite, Texas, was established in 1983 and specialises in safety, environmental, construction and industrial products. Branch offices are widespread and can be found in the following areas: Dallas, Houston, Jacksonville, Las Vegas, Los Angeles, Phoenix, San Diego, San Francisco and Seattle. ABIX also operate learning centres which give certification classes in the industries that ABIX operates. The learning centres are regulated by the government and also by industry related groups and can be found in Phoenix, Los Angeles and Jacksonville.
Before we proceed a word of warning is in order. ABIX has a miniscule free float representing 14.43% of the outstanding shares. This represents a $2.89m investment on a $20m market cap. Actually to be exact ABIX is capitalised at $19.8m.
The balance sheet can be summarised as follows:
|Current Assets||$ millions|
|Total Current Assets||28.96|
|Net Working Capital||24.18|
There are a few important things to note from these figures:
· Inventory is high but this could be expected as ABIX has a large manufacturing operation
· The total liability figure consists mainly of $3.55m payables. There is no debt on the balance sheet
· A quarter of the balance sheet is represented by a net cash position
· The company trades at a 18.11% discount to net working capital
Based on the balance sheet the company looks cheap. Usually my next port of call is to scrutinise the cash flow statement for free cash flow but ABIX has not filed such a statement of late. However on a historic basis the company has shown good free cash flow. The company’s asset base has been increasing year on year – working capital has nearly tripled over the last decade – so we will assume that the company still generates sufficient free cash flow.
ABIX has increased its cash position from $100,000 in 2001 to $4.91m today. Similarly it has increased shareholder equity from $7.84m to $25.19m over the same period.
In order to reward shareholders, management included as they hold around 50% of the issued share capital, the company announced a $2m share repurchase program in 2011. Currently 7.4% of the issued share capital has been repurchased.
In terms of the profit and loss account revenue has remained fairly even over the last decade with turnover varying between $48.89m and $83.36m and increasing from $59.8m to $69.29m over the same period of time.
What is important to note for ABIX is the industries that the company is exposed to. Large disasters, such as floods, earthquakes as shocking as they are, represent a significant income opportunity for ABIX. A small change in revenue equals a disproportionate change in net income. In other words ABIX is highly geared operationally.
From this perspective investors could buy ABIX is a slow year and sell when the company has a bumper year. As is usual with value investing patience will be needed with this approach.
Unusually for a net-net ABIX has been profitable over the last decade and the tax rate has been somewhat consistent.
A large negative is that the company has $4m worth of non-cancellable operating leases. If the company keeps operating as a going concern then these leases should be of no worry to the investor. However if operating problems do arise then these leases should be appropriately discounted and then be subtracted from the working capital figure. The amount to be deducted would depend on the discount applied to the lease(s) and the number of leases made redundant.
Perhaps the reason that ABIX is currently trading as a net-net is that the return on equity has fallen from 16.67% in 2001 to just 6.65% today. The reason is described above: assets have simply grown faster than revenue has.
In conclusion I feel that ABIX is a solid net-net worthy of consideration for investment. Personally I will refrain from purchasing the shares at the moment although if the shares trade at a 33.33% discount to net working capital then I would have to purchase a stake. I would also not be surprised if management either delisted the company or mounted a management buyout at the current price.