Finding Quality Management in the Micro-Cap World: Tandy Leather Factory, Ark Restaurant, Winmill and Bexil,

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Feb 24, 2009
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It’s not that easy to find management teams that understand capital allocation in the world of micro caps. Most just seem to go through the motions of trying to make their small companies big, without much regard for return on capital or waiting for a “fat pitch” before investing that capital. However, there are some that can be spotted and in the current environment, I believe you can partner with a few of them at significant discounts to their intrinsic values.

Tandy Leather Factory (TLF, Financial)

Last week, TLF announced their CEO, Ron Morgan, was leaving. You may think this would kill my good management thesis, but it doesn’t. Mr. Morgan and Chairman Wray Thompson (CEO before Mr. Morgan took over) did a great job of building TLF to what it is today, creating a culture of thrift, and building and training great managers throughout the company. Mr. Thompson’s son, Jon Thompson, will be taking over for Mr. Morgan. He’s been a big part of the company for a long time and I don’t expect TLF to miss beat with him in charge. CFO Shannon Greene has also been with the company for a long time and has done a remarkable job of keeping expenses down and being open and honest with shareholders. TLF is a niche company, but one that has little to no competition. Trading for less than book value and an EV/EBIT of about 3, this could be a pretty attractive opportunity to partner with what I believe is a great team.

Winmill (WNMLA, Financial) & Bexil (BXLC, Financial)

I’m including these two together because they are managed by the same people which, most prominently, consists of the father-son combo of Bassett and Tom Winmill. They have a significant stake in each, so their interests are pretty well aligned with shareholders. Currently, BXLC is just a big pile of cash that is looking for a business to mate with. Previously, Bexil consisted of a 50% stake in York Insurance Services Group which was sold in 2006 for an approximately 17x cash on cash return over four years. While I’m not expecting that kind of success to be repeated again, I think the Winmill’s patience in waiting for a great deal to come along is a testament to their capital allocation skill. The current environment is probably a pretty good time to have $38 million of dry powder. That big pile of cash adds up to about $41 per diluted share, versus the current market price of $24 per share.

WNMLA is the investment advisor for the Midas family of funds, which currently has about $100 million under management. There are a few other assets within WNMLA, but the most important are the advisory business and its stake in Bexil. When including WNMLA’s share of Bexil’s cash, I estimate that WNMLA probably has between $4 and $5 per share of cash, net of all liabilities, versus the current price of $2.02. So, I think WNMLA is a 50 cent dollar just compared to their cash balance, without any regard to the money management business (which I think is valuable) or other, smaller assets. Unlike Bexil, WNMLA hasn’t kept up to date on their filings since Q3 2007, so we don’t know for sure what the balance sheet really looks like….but I think management’s track record, large ownership stake, and the margin of safety make it worthy of consideration.

Ark Restaurants (ARKR, Financial)

After getting burned earlier this decade by placing big bets on a couple of big projects, ARKR has spent the time since then paying off debt and switching to a more diversified, higher return on capital model. They are setting up more management service contracts and trying to do more joint venture deals. They are still a restaurant business, but they focus on very specific, high traffic areas when doing a restaurant deal. About 1/4 of their market cap is in cash and they are in a good position to take advantage of current opportunities. They suspended their dividend and buyback because they think making potential acquisitions and/or joint ventures are more attractive right now. Mr. Weinstein (Founder and CEO) said good restaurant businesses are now being presented to them as potential acquisitions for 1-3x EBITDA that were 8-9x EBITDA last summer. Management focuses on cash flow and has their own net worth on the line. If they can stay CF positive, there shouldn't be too much downside from here and there could be significant upside from the investment of their cash into high ROC projects. The risk is a decent dependency on casinos and other locations that could still have significant suffering to come in the downturn. With a higher fixed cost component in these types of operations, it may be easier to turn CF negative, but a good balance sheet and experienced management team with the proper incentives may make this worth a look.

Disclosure: the author has an indirect interest in TLF, WNMLA, and BXLC.
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