ACEH (a bulletin board stock), ceased operations and sold its operating subsidiary and Sands Casino in Atlantic City back in late 2006. The cash proceeds from the deal amount to some $21/share, around the current book value of the company. This cash remains in an escrow account accruing interest and should be released as unrestricted to the company in 10 months if all goes smoothly, which I predict it will.
Since the company has no operations and no intentions to revamp any going concern business, this $21 in cash will likely be distributed as a liquidating dividend within the next year or so. The stock, though, trades for a mere $16.45, which effectively offers a cool 25% profit. Given the tax treatment of liquidating dividends as capital gains, the after tax profit still represents a very respectable annualized gain by my estimates.
There is a time-value risk that the funds sit in escrow for a while longer than expected, as well as a risk the firm runs into liabilities that it must cover with the escrowed cash. Someone with more legal expertise than I could probably better size up these risks by checking the escrow and acquisition agreements.
I checked out the small (but famous) hot dog maker, Nathan’s (NATH), a few weeks back and liked what I saw going into the company’s annual hot dog eating contest. Yes, the shares have spiked following earnings and on some excitement leading up to the contest, but I still think the shares represent a compelling long-term investment.
For starters, as largely a franchiser (the company only operates a few stores itself), Nathan’s has been generating lots of cash for years and has low capital expenditure requirements. Back a few weeks ago, at some 12x cash flow (it’s now around 15x) it was available at a great price. Revenue has been compounding at a steady albeit low clip of around 7%, but operating margins have improved from 13% to over 18% since 2003. Debt is nonexistent, and returns on average equity using cash flow rather than earnings have been a respectable 15-20% in recent years.
That’s all great, but here’s what I really like. First, the company has plenty of room to grow. With operations in only 22 states and a tiny footprint in just 10 other countries, there’s tons of room for opportunity. That in itself is not enough to justify excitement, but what’s great about franchises with simple businesses, particularly food and retail chains, is that they generally can duplicate success to achieve growth and advantages of scale simply by copying itself in a different geographic location. Though cultural differences surely play some role in an region’s tastes for fast food, it’s unlikely, at least in America, that a great hot dog in the Northeast wouldn’t be enjoyed by folks in the Southwest. Branching abroad may be a bit harder in countries that don’t know the brand or don’t exactly enjoy hot dogs, but I give kudos to management for setting their sites internationally for growth.
The company also enjoys a unique niche in the fast food industry and can really leverage its growing popularity thanks to the Coney Island hot dog eating contest and other generally successful marketing strategies. Despite how unsexy or commonplace a hot dog may seem, I can’t seem to think of a storefront-based company with a bigger presence or more popular brand name associated with hot dogs. Companies like this often benefit from compounding popularity and success. Just like Subway, Starbucks, etc., Nathan’s should be able to enjoy growth from a feedback loop where popularity drives growth, which drives more popularity and recognizability, which drives further growth, and so on.
Of course, I’m not claiming Nathan’s is “The Next Starbucks,” but with no coverage, a tiny market cap, plenty of room for upside, and the potential for compounding success, I like it as a long-term play. I also think it’s only slightly above the low side of my pretty conservative valuation, which places the fair value of the shares at anywhere between $16 and $32 depending on growth rate assumptions. I think a “best case” valuation could place the shares as high as $42. Regardless, great business + strong growth potential + fair price = solid returns over time.
I had some entirely unsuccessful and obfuscating conversations with Heron Public, Eternal Technology’s investor relations department. The failed to follow up on some simple questions (like “who are your major customers?”) and had trouble understanding what I was asking for others.
Language barriers are a problem, so I won’t fault the company for this (yet). I still think the opportunity, if nothing lurks beyond the surface, is interesting and enticing. I bought a small chunk of stock weeks ago and have seen a nice return following the 5% stock buyback announcement. I don’t think it’s all that great news, given that the company has been massively dilutive in its issuance of lots of shares, often at cheap prices (not a spectacular sign).
Yet the multiples are still dirt cheap (less than 65% of my estimated book value and at a PE multiple that will make you salivate) and I figure it’s worth the calculated risk given the small stake and possibly large upside. The verdict is still out on whether the business model is sustainable, but the downside risk exposure of massive failure in the operations of the business anytime soon is virtually nil.
As I mentioned in my last post, I still believe LENS is a buy (or at least a hold) in the face of its lackluster quarterly results.
I’ll keep the reasons brief and in list form.
1. LENS still trades around half of readily salable assets. Its inventory position has improved as has its cash equivalents. There remains little to worry about on the liability side.
2. Despite widening since last quarter, losses have still narrowed year over year. This is clearly not the optimal scenario, but I find it little to worry about. Exitting the digital camera business was a necessary, smart move, and while it has hurt sales, it will continue to add to the bottom line and improve cash flow. SG&A continued to fall year over year (by 41%) and compared to last quarter (by 13.8%), a positive sign.
3. I now believe there are several possible catalysts to bring the price more in line with book value. To me they are a) a buyout by an outside investor or management, b) the potential exit of competitors from the unattractive SUC camera market, a boon for LENS, which might benefit from greater sales, lower costs from more volume, or, in the best case, a combination of both, c) improved margins leading to big upside given such a low price/sales ratio, and/or d) heavy institutional buying or general improvement in sentiment.
Naturally, for every favorable factor there is an opposing risk. I find those to be:
1. Management can waste money on risky or unprofitable ventures, thereby eroding the still strong balance sheet.
2. Sales are still highly dependent on a very small number of customers, exposing the company to the possibility that one or more stop purchasing SUCs. The company needs to pursue relationships with new customers if it is ever to meaningfully increase sales, and such a task is always easier said than done. Also, there is a limit to how much a company can cut costs before it simply can’t go any more, and there is always the risk that cost cutting measures simply won’t be enough to eek out profits.
3. The probability of any one catalyst driving up the price remains small, though in combination I still feel the chance is meaningful.
Basically, my stance on the company has changed little from the quarterly, and the basic thesis remains in tact.
Concord Camera, my largest holding and a company on which I’ve written twice, posted its 2Q results recently.
Investors sent the shares down almost 10% on the announced losses and declining sales before the company rebounded yesterday with a 3%+ gain. Personally, I think that while the 0.60/share loss seems like “bad” news despite the improvement year over year, the thesis that LENS is first an asset play before anything else remains the same. The company continues to trade at around half of book value, and, reassuringly, has bolstered its cash position and cut inventory.
Seeing my penchant for micro-cap stocks, a few readers have challenged me to share my “smallest” idea. I often find that good things come in small packages, and this may be the winner, at least in the “small package” department. It’s an itsy-bisty, teeny-weeny, little stock — barely visible under a microscope and about as illiquid as a rock.
Market cap, you ask? A whopping $580,000.
Transtech engages in the “supervision and performance of landfill monitoring, closure, and post-closure procedures. It provides environmental services for landfill and remediation sites. The company also engages in the management of methane gas recovery operations, and the generation and sale of electricity using methane gas.”
Here’s the (very simple) thesis and my take on its corresponding risks: Selling at $0.20 a share, the company has more than $1.20/share in tangible book value. Most of the book value is in cash, Treasuries, and restricted escrow accounts on the asset side while most of the liabilities are in “post-closure costs,” which are incurred by the company largely for a landfill it ceased operating in 1987.
This may seem like a huge margin of safety, but there are some clear and significant risk factors (aside from the obvious illiquidity problems). First, the bulky post-closure liability of around $8.5 million is, at its core, an estimate by the company and some third-party researchers. Using a standard discounted cash flow estimate, the company uses a 2.5% inflation rate and a risk-free 4.5% discount to reach its number. Estimates are also made in terms of how long post-closure activities will continue. Standard post-closures stretch thirty years, leaving another 10 for this particular landfill (1987 - 2007 represents the first twenty years). This is a model quite sensitive to inputs, which might be a concern for some investors (but since it works both ways, this could also understate the true post-closure cost).
Second, and no less important, the company runs perennial losses after adjusting for one time insurance claim gains in the past few years. It’s revenues are not nearly up to par with their very steep SGA expenses (including executive salaries approaching the market cap of the entire company).
Third, the company is also party to a number of lawsuits and governmental/municipality actions which could materially damage their results and their balance sheet.
It’s certainly not a stock for the faint of heart — its unclear liabilities, losses, and, of course, itsy-bitsy size are definite risks. But others may find its current margin of safety too nice to pass up.
