The Company is a retailer in the consumer electronics and appliance industry, serving small to medium-sized towns and communities.
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Let's see, an electronics retailer that has decided to branch out into alternative fuel, in this case ethanol? First, anyone who's spent any amount of time perusing my pick list or pitches knows what I think of the ethanol industry, but…
Does this remind anyone of another pick of mine? You know, some other company, this one in the pet hotel business, that decided to branch out into alternative energy? (Hint: AVFS.OB)
How's that turning out so far? When looking for a business to invest in, I prefer a company that has what I believe to be a sound, *focused* strategy, and a track record of successful implementation - not one that tries to suddenly get into a completely different business and industry than the one they have experience in.
Sure, unlike our friends at AFV Solutions, this company actually has some revenues, profits, and positive operating cash flow - all kinda important for businesses to have - but branching out in a direction completely out of line with the existing business is a daunting challenge at best. Given that this new business is ethanol, well… this looks like an pretty compelling underperform call to me.
You could be right, but probably you are wrong because the company is so cheap that even screwing up the etanol business they will be able to thrive and survive.
If the retail electronics business were on solid footing, I'd agree with you. Trouble is that with the plethora of low cost behemoths out there (including but not limited to the likes or Best Buy, Circuit City, Costco, etc.) it is becoming increasinly difficult for just about everybody - and especially for those without scale. We saw this with regard to home improvement / hardware stores, and I think we'll see it again here.
After all, if the electronics business were on solid footing, I doubt management would be investing in ethanol in the first place as they'd be better served reinvesting that capital in the electronics business.
What we have here is a company that is slowly being squeezed out by bigger, lower cost competitors and is looking for a way to survive by diversifying away from the eroding business. This in and of itself is a very difficult undertaking, and that this new business is ethanol, well, it casts that much more doubt in my mind as to the long term profitability of this company.