As much as we label it the stock market, to me it is a market of stocks. Meaning that I have the ability to compare companies in different industries to each other when selecting where to allocate my capital. Sure I still compare one company to its peers to benchmark operating performance, but what’s best is that I can go wherever I please to seek an attractive return. The catch is that I can quite easily step outside my circle of competence.
Whopper is doing a really interesting project at the moment. He is having people practice valuing a company from the past. I do something similar with a friend of mine. Every month we take turns picking a company to analyze. Sometimes it’s something we are interesting in, other times its just for the exercise. The source of ideas varies wildly. Enter Atrium Innovations (ATB.to).
Atrium came up on a screen I ran for low P/E stocks quite a while ago. It is an interesting Canadian name as we don’t have many major global “healthcare” stocks with lots of liquidity. I mean just look at the recent share price performance and any value investor should be interested.
From their website:
“Atrium Innovations Inc. (Atrium) is engaged in the development, manufacturing, and commercialization of dietary supplements endorsed by health professionals. The Company distributes its portfolio of products in the healthcare practitioner and health food and specialized store channels, with a focus in North America and Europe. As of December 31, 2011, the Company developed, manufactured and marketed more than 2,000 health and nutrition finished products. These products are generated from natural sources and include vitamins, minerals and specialized products, such as enzymes, probiotics and omega-3. The product line of its subsidiary Pure Encapsulations, Inc. (Pure Encapsulations) consists of more than 400 nutritional supplement products, which are provided in vegetable based capsules.”
Dietary supplements are growing at least the pace of GDP, likely more. This is a good tailwind for ATB. Something that I think I should mention is how little I know about the industry. I’m not a (dramatically) overweight person, but I struggle with the value proposition of these products. I mean if I needed to return to a healthy body fat %, I would be better off spending my money on a nice pair of running shoes and eating well rather than supplements. Maybe that’s just my opinion, but a healthy diet and exercise should be the supplement. Having said all that, I look to own businesses. If ATB can generate a decent return by selling air conditioners to penguins, I’m game. I mean I used to own NTRI.
My analysis will stick to the quantitative side of the equation.
ATB has been a growth through acquisition story. Here’s some per share numbers.
Per share revenue has grown nicely. Like I said this is a growth through acquisition story. The acquisitions have been made through debt, so the per share numbers look better than they really are.
Maybe I am being unfair to ATB. I mean growing through acquisition is a fine strategy. Especially if you are using debt to finance and have very well laid out integration strategies.
Here are the margins on a TTM basis and quarterly.
Flat or steadily decreasing margins despite the rise in revenue. This is actually quite worrying as there appears to be no scale in the business. Actually, there appears to be “negative” scale. I begs the question what are the margins on the incremental increases in revenue.
Now Lets take a look at some other operating metrics.
Like the last set of charts, this chart shows that EBITDA margins are slowly decaying. This is leading right into a steadily falling ROC number. We are starting to approach 10% ROC. Still around or above WACC, but not a nice trend. Coupled with this the CCC is rising. This means that more capital is required in the business to generate the same profits.
Insider ownership is lacking. The board, including the CEO, owns less than 1% of the company. To be fair the CEO has about 1x his total annual compensation value in shares.
Though the TTM P/E is about 7, and NTM closer to 6. EV/TTM E is almost 12 and EV/NTM E is about 11. EV/EBITDA is 7.6. I get EPV fair value around $9 and DCF fair value around $13.
There have been quite a few initiatives taken to strengthen the penetration into ATB’s various growth markets. To be fair to the company, the numbers that I look at only look backward, not forward.
I am passing on ATB. Given the levels of debt, limited number of insider ownership, and lack of industry understanding, I think I can find better value elsewhere. I will take my chips to the table where I feel I have a better chance of succeeding.