As mentioned above Reconditioned Systems is simple, they take old office furniture, recondition it, and resell it as recycled office furniture. The company receives over 1,000 tons of furniture annually at their facility in Arizona. They receive over 200 truck loads of used cubes and uncomfortable chairs in various states of disrepair a year. The company then takes the furniture, refinishes it, re-paints it, and resells it as environmentally friendly and new. In todays market I'm sure there is no shortage of old office furniture ready to be recycled.
The US Government is a large purchaser of the company's wares. They state on their website they are veteran owned which might give them preferred treatment in the government supply food chain.
The company appears to have earning power that would support book value, placing them in a category I like to call two pillar stocks. Recent results have been depressed due to an early lease buyout and a lawsuit settlement. The company's quarterly letters don't give much detail on these two items, so we have to take them at face value.
Quick Thesis
-Last trade at $2.49
-Book value of $4.25 per share
-Paid a $.12 dividend this past year for a 4.81% yield
-P/E of 8.3
-Max earnings $.73, min earnings -$.33
The two pillars
The first pillar of the two pillars is book value. The company's balance sheet doesn't appear to be terrible. They don't give any detail on long term liabilities so I would assume they are debt related. Due to the lack of a easy to use balance sheet (they only provide a summary on their site), I've created my own below:
This spreadsheet doesn't need much explanation, about half of assets are comprised of their Tempe location, and the rest are current assets. Liabilities are payables, customer deposits, and the mysterious "other long term liabilities" category. Other long term liabilities make up $3.4m.
The second of the two pillars is earnings, the company's earnings record over the past eight years is shown below:
The earnings trend is pretty clear, everything was going well until the financial crisis. Companies tightened the purse strings, and office furniture wasn't replaced. I wonder aloud how much of the company's supply was from Bear Sterns and Lehman Brothers in 2008? Coming out of the recession Reconditioned Systems appears to be getting back to business. Sales have slowly recovered, while profits have recovered a bit quicker. The company has been buying back shares, and has a note on each press release offering to buy back shares from shareholders at any time. A decreasing share count is never a bad thing, especially when the company is undervalued.
Conclusion
When it comes to a turnaround I'm reminded of a comment someone left on a post a few weeks back. They said turnarounds are easier when cost cutting can lead to profitability rather than a company needing an increase in sales. A company who only needs to cut costs holds the future in their hands. A company who is relying on the marketplace for increased sales is beholden to whatever economic environment exists. The company could use a mix of the two; reduced expenses, and a slight bump in sales. Without the lease breakage fee in 2012 the company's net income would have been close to $600k, double what it was.. This current year the company's profits have been depressed due to more one time events. If the one time events are truly one time there's no reason a company earning $.40-$.50 a share shouldn't trade at or above book value. If the company does eventually trade up to book value it will take a 70% move to get there. I would say that 70% for an hour of time is probably a good return.
Disclosure: No position
- What were the "one time" events?
ReplyDelete- Why are sales not growing? Why did they decline before the crisis? Who are they selling to?
- How do you figure out what a sustainable level of net margin is? Not much of a trend in it... You can't call earnings reliable so I won't put much emphasises on it.
- "A decreasing share count is never a bad thing, especially when the company is undervalued." => A decreasing share count is ONLY a good thing if the company is undervalued. An increasing share count can be a great thing if the share price is above intrinsic value. I hate companies that buy back shares at any price, terrible.
- sales aren't recovering for the last year. Why not?
There are to many unknowns for me to get comfortable at anything close to this share price. I don't see the margin of safety.
Theirs a company called recycling centers of america {ARCI} Its kind of simlar to the company in the post. What they do is sell new applances that have a slight defeat not function wise but maybe a less than great coat of paint or a dent in the metal. Sometimes they are able to buy close out merchandise at a good price. The company has a separate division that recycles junk applances for scrap. Until recently they were profitable but the last two quarters were negative. Sales of the company have increased from 100 Million in 2010 they should do around around 130 million for 2012. This appears to be a really great value stock the market cap is just 17 million but the company does 130 million in annual sales. Seems like the sort of company Warren buffett would buy if his Berkshire hathaway was just starting out today.
ReplyDeleteThe increase in long term liabilities was a building purchase in May, 2011 for $4,375,000. Way too much debt for a company of this size, a couple of bad quarters and they will be struggling to pay bills. You can cut other expenses, but the bank note won't disappear.
ReplyDelete