OldSchoolValue (< 20)

You don't see many stocks like this. Profitable Net Net.

January 07, 2012 – Comments (1) | RELATED TICKERS: AEY

Original article with proper formatting.

http://tinyurl.com/7arhwwr

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 ADDvantage Technologies Group, Inc., through its subsidiaries, distributes and services a line of electronics and hardware for the cable television (CATV) industry. The products, the Company sells and services are used to acquire, distribute, receive and protect the communications signals carried on fiber-optic, coaxial cable and wireless distribution systems. Its customers provide a range of communications services, including television, high-speed data (Internet) and telephony, to single family dwellings, apartments and institutions, such as hospitals, prisons, universities, schools, cruise boats and others. The Company’s operating subsidiaries include Tulsat Corporation (Tulsat), Tulsat-Atlanta LLC, ADDvantage Technologies Group of Nebraska, Inc. (doing business as Tulsat-Nebraska), ADDvantage Technologies Group of Texas, Inc. (doing business as Tulsat Texas), Jones Broadband International, Inc. (doing business as Tulsat-West) and ADDvantage Technologies Group of Missouri, Inc.

Why is it Cheap?

boring businessreseller of equipment to companies such as comcast, direct tv, centurylink etcindustry risk. Consolidation could mean loss in revenue. Customers have slowed down their network upgrades.builds up inventory of new and used equipment to sellnot followed or held by any of the big boys

Management

not much insider buying even at these low levelstotal exec compensation was 2.4% of revenue in 2010. Below my 3% threshold so good.

Growth

not much room for growth. But with such a healthy balance sheet, their returns does not have to be high to produce growth.market is assuming that the max it can do is 4% growth by reverse engineering pricesacquisitions will help with growth. Their acquisitions are small and targetted based on the target's distribution channel and product offerings.

Moat

Niche player. Can't beat the OEM's in providing equipment, but does take advantage of the many black holes left behind by them.sustainability is absent though. A new competitor with money could come overnight and take them out.

Competitors

competitive businesstrading at net net value means there are better competitors otherwise it wouldnt trade below asset value

Risks

 

inventory valuation. If it had to be liquidated, how much would it be worth?Strategy of building up inventory – very low inventory turnovers. All costs money and working capital.New agreement with CSCO isn't the best. They now have to resell CSCO products which will lower margins.no dividends. just builds cash.dont see much chance of buyout for such a company

Valuation

no matter what I try, I keep coming up with a low range of $2.80 to $3 which gives 34% upside potential as a minimum.Operating at low end of business cycle as the industry has slowed down. Cash flow will reduce.I'm estimating EPS of $0.28 for 2011 without doing much more work.

Catalysts

Industry starts spending for network upgrades(hmm can't think of many catalysts other than being cheap)

Conclusion

Quality net net currently operating at the down cycle. Room for revenue and cash flow growth if the industry picks up. A bit too reliant on external factors but management has been able to handle the business very well. Great ROE, CROIC for a net net. Not many profitable ones out there. Business is easy to understand and the biggest risk really comes down to whether the inventory is really worth what it is.

I wouldn't call it a value trap because their business model is consistent.

Verdict

Management: BGrowth: CMoat: CRisk: AValuation: A

Buy a small position and wait for a long time to play out.

Disclosure: I own this stock.