Let’s get some of the background out of the way…
Here are 2 links that provide bullish cases
and one that provides bearish (or at least cautious)
my original is here
OK, now we are caught up.
Since my purchase I have had AEY lose a fair bit of value, going from $3 to $2.25. Though I can’t say for sure whether I am right or wrong, I can say I was definitely early.
When I first read Ben Graham’s work, it made sense. It still does, but it has limitations. NCAV is nice, but sometimes things don’t belong in the “current” side of the equation. Some things that are in the “long lived” or “non-current” belong in the “current” side.
Obviously I am talking about things like inventory, receivables, even cash on the current asset side. Some inventory or receivables can take longer than a year to turn into cash. As such they should be in the non-current side. Under GAAP and IFRS they may not need to be put there. A perfect example is the inventory at AEY. Some of it is turned over 6-8x per year, others aren’t. Does it mean that it is worth less? No, but you may not see that money soon. Conversely, a company may be selling a piece of equipment that is not current according to accounting rules, but certainly is current in reality.
You are asking why the cash may not be “current”. Many times it sits on the balance sheet doing nothing at all. Eventually it could be spent on something STUPID. I can see it and I find it hard to listen to on conference calls. “Strategic acquisition”, “weighing our options”, etc. are common excuses. Sometimes it makes me want to throw up. I mean buyback shares or issue a dividend already.
NCAV – the learning curve
Putting zero value to equipment will eliminate many companies from your NCAV screen. Though the assets aren’t liquid, they are usually worth something. Putting a % discount on them doesn’t make much sense either. To arbitrarily assign 50% or 25% of stated value may seem OK, but it probably shouldn’t replace some number crunching. Looking at equipment values relative to production capacity and stated value (net of depreciation) are two simple ones if you can find them. That’s where NCAV does make sense, you get all the PPE for free. At the same time you could be overlooking a company that is trading at 10% of liquidation value because all its value is in plants, or real estate.
I still own AEY. I have learnt the hard way about having a margin of safety with companies in decline and initial position sizing. Essentially I bought too much too soon. I have been buying on the way down and now have a position larger than what I am comfortable given the risks involved.
The biggest risk is still the inventory and the Cisco agreement. The Cisco agreement prevents them from selling new Cisco products in Latin America and only selling to select end users in North America.
Cisco is a good chunk of revenue and new inventory, so this is actually a decent hit to a potential return to previous profitability. There will be lower margins on the Cisco products going forward as well.
The inventory is the largest part of the valuation mystery. There has been decent amount of older and refurbished inventory in preparation for a push into Latin America. This is why the latest acquisition makes sense to me. AEY now can push its old inventory through its new channels in Latin America. At least that’s how I see it. Though it remains to be seen.
AEY is still cheap. Less than NCAV and tangible book. I should have demanded a larger margin of safety on my initial purchase. I have retooled my trigger numbers for a company like AEY and it seems that all trigger numbers should be asset focused, not earnings. On that basis AEY is a buy under $2.35.
Yes we have hair on this one. I mean what do you expect with a NCAV stock. But I think there is a decent margin of safety. The latest agreement sucked. That’s the thing with NCAV stocks, the business usually sucks (at least in the short term).
Trying to envision a catalyst seems wasteful. Earnings will be driven by major whether short term and housing starts long term. This is of course only what my brain can see at this time, other catalysts may emerge.
Disclosure: The author is long AEY.