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ADDvantage Technologies Group Inc. Message Board

  • bubble_go_bye_bye bubble_go_bye_bye Feb 14, 2007 4:39 PM Flag

    About those digital boxes

    Last quarter there was a lot of investor anxiety about whether AEY could sell all of the legacy digital boxes they bought, fanned by comments in the earnings press release about all of the stuff that could go wrong (FCC ban July 1, etc). This time we learn they've already sold 7100 of them and seem pretty confident in their ability to sell the remaining 90,000. On the CC they said they hope to sell at least half of them by July. If they sell 20,000 boxes in each of the next two Q's, at $100 apiece, that's an extra $2 mil on the top line for each Q which would add something like $1 mil per Q in gross profit. Let's say they pay $350,000 FIT on that, leaves $650,000 net or about .06/share in each of the next two Q's just for digital boxes, let alone the regular stuff they sell. On the CC at one point they said that if all goes according to plan they could be looking at record revenue and EPS in FY 2007. Which is why I was a heavy buyer of AEY today. I think with any luck at all we will see 6.50-7.00 on the stock in the next year or so.

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    • Going over the 10-Q and reviewing my CC notes, 1/3 of the gross margin decline is the higher COGS due to having to buy directly from manufacturers and which is predicted to improve (as you just mentioned). The other 2/3 comes from a $200k increase in the reserve for future inventory obsolescence that might cause writedowns. This is a charge for a potential event, not something that has happened (and may not happen, in which case it will be reversed). Do you have any idea as to why this reserve was bumped? Is this due to an increased probability of future obsolescence, or some other reason? Another question: if the increase was for $200k, then why does the "Cash Flow from Operating Activities" show only a $75k positive offset for that? I cannot find a similar line in the year-before 10-Q. On the whole, though, their performance sounds solid.

    • "A positive recommendation from Nobile would definitely be a good catalyst to get this stock price up, despite his lack of credibility."

      It was over a month from when the Sept Q and FY results were announced to the Jan 16 release of Nobile's downgrade. Hey, he's got something like 13 stocks to cover; he's busy. Nobile participated on the Feb 13 CC and, if memory serves, congratulated mgmt on a good turnaround and good Q. Whether he'll revise estimates for a second time in such a short period is another story - like you said, his credibility is already a bit in question and his revised estimate for the Dec Q was beaten handily (.14 actual vs .09 revised est). To be fair, AEY is this tiny little microcap and it's awfully difficult to make projections, especially with mgmt apparently not in the business of offering guidance.

      Your point about declining gross margins is well taken and probably a big reason for the awful slide in the stock over the past year. Mgmt has said margins have been under pressure because the product mix has moved to lower margin new equipment and away from higher margin used equipment. For the next couple of Q's the digital boxes should goose the margin quite a bit (I'm hoping, anyway) and longer term they should be able to get their hands on more used equipment as some operators upgrade relatively new digital equipment to even newer digital equipment.

    • A positive recommendation from Nobile would definitely be a good catalyst to get this stock price up, despite his lack of credibility. Bubble, I also agree with your opinion on how to play this stock: buying and holding for a few months, but not super long term. I hope to be out by this summer.

      One decent reason I'm scared to buy and hold is this:

      Check out the gross margin decline, it's pretty steep. To offset that, the inventory turnover is slightly trending upward, but still, there are better risk/rewards out there for long term plays, IMHO.

    • Yes, my first small purchase was at $3.75 and the stock went vertical after that. While I wasn't buying when the IBD stocks under $10 crowd sent this stock vertical, I have accumulated shares at higher levels than my original purchase. I did not panic at the recent 52-week low but given a meaningful stake I could not commit any more capital to a company with continuing lackluster results. My mistake was becoming complacent about a fair multiple. At $8 the TTM multiple was still below the market median but higher than its historical norm.

    • "What is a fair multiple for a zero-growth stock? Perhaps AEY has been overly punished with a single-digit multiple in recent months but I have given up on expecting a multiple out of AEY anywhere near the market median."

      I can understand your frustration. You said earlier you bought in Aug 2004, when the stock was trading in the high 3's, about where it is now, so you've held for 2 and a half years with nothing to show for it, although it has done a round trip on you a couple of times (highs of 6.30 4Q 2004 and 9.09 1Q 2006). Sales and EPS are higher than they were 5 years ago but growth in the last couple of years has been less than spectacular and they've had their share of difficulties.

      That said, the company has been solidly profitable throughout and has strengthened its balance sheet. I go back to what I said earlier; it is a sine wave stock, not a growth stock. If you look at a four year chart, it really does look like a sine wave, albeit not all perfect and symetrical to be sure. Peak of near 7 in early 2004, back to the 3's mid 2004, above 6 late 2004, low 3's mid-2005, peak of over 9 early 2006, then a wrenching slide to below 3 late 2006/ early 2007. I'm still kicking myself for not pulling the trigger in the low 3's when it was a screaming buy.

      I think the trick with a stock like AEY is to trade it rather than put it away in a drawer and hold it long term. When I say trade it I mean over a period of months rather than days or hours, but the point is that AEY is going to go in and out of fashion depending on short term outlook. You can make money by buying when all is doom and gloom and selling when everyone is euphoric. That's my plan anyway; we'll see how it pans out.

    • Good point. Hershey trades at a PE of 20, and has a much worse balance sheet than AEY, and is undergoing restructuring and layoffs. The advantage goes to Addvantage.

    • "What is a fair multiple for a zero-growth stock? "

      That seems like an oversimplification. Risk is a factor in the equation of calculating the yield whether it be for stocks or bonds. A company similar to Hershey's definitely warrants a higher multiple than Addvantage, despite both being relatively zero-growth. Big difference in risk premium.

    • I have been in AEY somewhat regrettably since Aug04. The attraction of the low earnings multiple can be deceiving. Yes, AEY may hit $0.50+ in EPS for FY07 and perhaps a $5 or higher one-year price target is achievable. But note significant resistance at $4 and $6 as this stock was once an IBD stocks under $10 play. AEY had one blowout quarter several quarters ago, gave "record year" guidance and then managed to disappoint with flat to lower EPS now four quarters in a row - one excuse after another. My advice would be to note the high level of inventory days and exercise caution in fair EPS multiple assumptions. The digital boxes may help 2007 results but due to the ban they will be of minimal long-term benefit beyond that IMO. Free cash flow generation the last several quarters has been disappointing...

      It's nice to see someone on this board comment on something about the business rather than merely pump .ob stocks.

      • 1 Reply to garp_trader
      • Yes, free cash flow was poor in recent quarters, but prior to that FCF was about the same as net income. FCF should be excellent in the coming quarters as should EPS. Ignoring the short-term impact of the converter box bonanza, EPS has been consistently about $0.50 on an annual basis as you mention, but sooner or later they will use their FCF either to gradually deleverage themselves, thus growing the bottom line, or make an accretive acquisition. So the stock should deserve a PE greater than 10.

        The problem with using IBD and charting is that they do not account for M&A and they do not account for disruptive changes in the business, as may be occurring here.


    • One thing that puzzles me though, is what happened to some of the boxes. On the 10-K they say they bought 100,000 boxes from Adelphia and another 15,000 from other sources for a total of 115,000. Now they say they've sold 7,100 and have an additional 90,000, which adds up to 97,100. What happened to the other 17,900 boxes? There was one question on the CC which kinda referenced this but mgmt danced around it and never really answered. So I'm scrating my head - did they cannibalize some of the boxes to fix other ones?

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