Whoa! Virtually guaranteed! What is Nelson, some sort of snake oil salesman? You can’t guarantee nothing, bucko! It’s the stock market, nothing is guaranteed, you dumbass! I’m so mad I’m using all the exclamation marks!!!!!!!!!1
Whoa Sparky. Settle down there. I qualified myself with “virtually” guaranteed, since the only guarantees in life are death, taxes, and my girlfriend complaining about sports. So I can’t guarantee anything. I do, however, think there’s a very good chance that you’re making 25% on this investment, with the chance of getting a couple of nice surprises to the upside. Let’s take a closer look.
Automodular Corp, (TSX:AM) is a maker of speciality auto components. They focus on making stuff that the big manufacturers deem to be either too complicated or just not worth their time. Currently they primarily make radiator parts, along with a few other things, for Ford Canada. Ford is their only customer. They used to make parts for General Motors, but GM terminated their contract with the company back in 2010, after asking them to reduce their price. Automodular’s management refused, the relationship was severed, and Automodular is currently suing GM for breach of contract.
The company briefly diversified into components of wind turbines, getting a contract with a large manufacturer in the space. This contract was completed at the end of 2012. The company is looking to get additional contracts in the future for wind turbines, but nothing has come up.
In June, 2013, the only customer the company has left, Ford, announced they were giving their one year notice to terminate their relationship with Automodular. They planned to move production in house, starting in June, 2014. Naturally, Automodular’s stock tanked on the news, falling some 50%. The company had a year left until they’d be out of business, unless they could manage to pick up any additional wind contracts.
Scroll back up to the title. Seems kinda laughable now, doesn’t it? Don’t worry, it gets better.
The company was due for some good news, and got it earlier this month. After some negotiations with Ford, both companies agreed to extend Automodular’s contract with the company out until the end of 2014 – giving them an additional six months of business. While there’s always the potential Ford extends the contract again, let’s assume for the rest of this post that things are finished at the end of 2014.
Automodular’s management is preparing for the inevitable, by putting money aside for costs associated with closing down operations. They’ve already budgeted $4M towards shut down costs, and they’ve said they’ll put another $4M aside sometime over the next year. As part of the extension, Ford has stated that they will cover any additional costs incurred by Automodular for keeping the doors open for the additional six months. Automodular has already come up with a deal with their unionized workforce for the added on time.
Remember, Automodular has been through this before, when they shut down operations with GM gave them the boot. They’re continuing to evaluate closing costs on a quarterly basis, but they don’t see any additional costs arising, besides the $4M already budgeted (and already wrote off). I’m inclined to believe them, since they’ve been through this over the past couple years. They’re experienced in shutting down a plant, which is kind of a sad thing to be experienced in, come to think of it.
Meanwhile, we have a company which is still operational, and is still churning out parts for Ford for the next 13 months. And, because they only have one customer and they’ve signed a contract for a certain amount of parts, it makes it really easy to predict future cash flows. Over the first three quarters of 2013, the company has pretty predictably cash flowed $5M a quarter, so let’s use that number as an ongoing amount. Counting the current quarter, the company stands to earn $25M in free cash flow through the end of 2014.
Looking on the balance sheet, the latest quarterly filings state the company has $34.8M in cash. The company has paid out a $0.16 dividend since, which is $3.1M, putting the cash level at $31.7M. (The dividend hasn’t been paid yet, but the stock has gone ex-dividend, meaning you’re not getting it if you buy in today.) Automodular has an additional $12.4M in receivables, $1.2M in prepaid expenses, and $5.5M in equipment. Total assets, including the expected cash flow, total $73.9M.
Liabilities are virtually non-existant. Current liabilities are $11.37M, which include the rest of 2013’s lease expenses ($816k) as well as the usual stuff, like income tax payable, raw materials that haven’t been paid for yet, and so on. The company will pay an additional $2.29M for lease space in 2014. They owe an additional $5.21M in operating leases in 2015-17, but management has already been in contact with the leaseholders and has put aside funds for breaking the lease in the first $4M of closing provisions. They don’t anticipate any additional costs, but the remote possibility exists.
So to summarize, total liabilities going forward are $11.37M of current liabilities, $2.29M for next year’s lease space, and $4M in additional closing costs. Total liabilities equal $17.66M.
The company has been buying back shares aggressively, reducing the float to 19.4M. The company has $3.81 in assets (again, including $25M in future cash flows) and has $0.91 in liabilities, including costs put aside for closing. Thus, Automodular has a value of $2.90 per share, a 28.9% premium of the current price of $2.25.
You guys aren’t dumb, you know there are risks in buying stocks, even ones that seems pretty risk free like this one. Automodular has one giant risk, and that’s if management decide to blow their brains out and acquire something. Management has a record of being disciplined in the past, and they’re on record saying that they fully expect the company to shut down operations at the end of the Ford contract. Still, it’s a risk.
Their relations with shareholders give us the same message. They currently pay a dividend of $0.06 a quarter, which works out to over 10% annually. Additionally, investors just got the previously mentioned $0.10 per share special dividend. They’ve also been buying back shares aggressively – including 600k during the last quarter alone – meaning I’m competing with the company as I buy stock.
There’s also the potential for a couple of upside surprises. The company is actively searching for additional wind turbine contracts, and has been in talks with a handful of manufacturers across the world. Additionally, the company does have an outstanding lawsuit against General Motors for $20-$25M for the termination of the contract. If they can get a $10M settlement, that’s worth an additional $0.51 per share, and turns this into a grand slam.
How has the market missed this opportunity? Automodular has a market cap of just $43.6M, and it trades in Canada. It averages just 99,000 shares a day. No analysts cover the stock. It is the very definition of an unloved small-cap company. Nobody big can get into this stock, which leaves plenty of room for investors like you and me. I’m not finding much in the market today, so opportunities like this one are extra sweet.
Disclosure: I own shares in Automodular Corp. My average cost is $2.25.