Dyna International, a pile of cheap assets but is there anything else?

If it isn't apparent to readers I have a natural curiosity about life.  I just wonder about things, I don't know why, and I can't help it; I'm curious.  I have young kids who ask 'why' often in an attempt to learn about life and their surroundings.  I've come to realize I'm no different than my kids, I've never stopped asking 'why', it's just that my questions and research have become more structured.

There have been many times where I've been sitting drinking out of a glass with a design on it and had the thought "I wonder who makes this?".  I've also had the thought when looking at similar commodity products "why would anyone want to manufacture or sell these items."  There is a subset of products that people use that don't appear to have a reason to exist.  It's hard to fathom how the companies behind these products make money.  For most companies the answer is that all work is outsourced to China, or Vietnam, or somewhere else cheap.  In a world of automation where I presume plastic and nylon cost the same worldwide I'm not sure why China is a better answer than somewhere closer, but I'll accept it at face value.  Maybe this is my curiosity getting in the way again.

Dyna International (DGIX) is a perfect example of the type of company I've wondered about above.  They make travel coffee mugs with sports team logos as well as a number of belt buckles.  The large majority of belt buckle designs are patriotic in nature with themes of America, guns, trucks, eagles and things associated with motorcycles and the wild west.  There is even a model that incorporates a bottle opener which is ironic because the type of beer I associate with belt buckles comes in cans and screw off tops.

The majority of the company's products are licensed items.  For example a coffee mug with the Steelers logo on it, or drink glasses with logos.  These types of glasses are great gifts for sports fans.  I speak from experience, all of my wife's family has Cincinnati Red's glasses that they love compliments of us.  Items with team logos will remain popular and sell at premium prices as long as sports and sports teams are popular.  Many designs are downright ugly, but they sell.  I'm speaking from experience again as we have a set of ugly Steelers beer mugs from their 2005 Super Bowl win.  At the bottom of the cup visible with each sip is a logo reminding the drinker that the Steelers won the Super Bowl.  I can't quite explain why we purchased these as they're hideous, but at the time we thought they were great.  Maybe some of you are laughing thinking "I'd never do that", that is until your team wins and you find yourself buying kitschy items with logos hanging all over them.

The problem with licensed material is that licensing carries a heavy cost.  The entity that makes the most money on the licensed material are the sports league itself.  Manufacturers creating products with logos are surviving with razor thin margins.  What's even more impressive about the industry surrounding these logo items is that Dyna International is a distributor to retailers.  Either the retailers are heavily marking up their products or there is really no money to be made at the point of sale.  All of the products on their site require a three unit minimum purchase and an approved account.  They aren't targeting a traditional internet buyer.  In the most recent quarter the company earned a net profit of $78,722 with a net margin of 1.7%, slim indeed.

The company's financials follow the same ebb and flow that most retailers do, losses for the first two quarters, a slight profit in Q3 and outsized profits in Q4.  As of September 30th the company had a year to date loss of $20k that should be resolved with fourth quarter earnings.  If history is any guide the company could earn anywhere between $.02 to $.05 a share for the year.  If they hit the low end the stock would be trading for a multiple of 10x earnings.  And at the high end ~4x earnings.

The company typically pays over a million dollars a year in licensing costs.  This gives them incentive to produce and promote their own line of goods without licensed logos such as their belt buckle collection.  If the company were to shift the revenue mix of products from licensed goods to unlicensed goods then earnings could dramatically increase.  But I don't see that as very likely.

What is attractive about Dyna International is their valuation.  The company has $8.3m in equity and $6.5m in net current assets.  With a market cap of $1.4m Dyna International falls deeply into the category of a net-net, and a profitable one at that.  The majority of their assets are receivables and inventory.

Many investors like to discount a net-net's inventory and receivables then wave the adjusted valuation as an excuse to pass on an investment.  That's not unlike someone who tries on an outfit on sale and then complains that the color isn't right or the fit isn't perfect as an excuse to not buy.  If Dyna International were to declare a fire-sale tomorrow then I agree that it's unlikely they'd realize their inventory or receivable accounts.  But this is a company in motion, they've been profitable for years and this year appears to be no different.  If they've had no issues selling their inventory at stated value, and collecting receivables in the past then why should we presume anything is different now without any evidence?  With evidence that their inventory or receivables are deteriorating I would agree, but in the absence of evidence it's just a flimsy excuse to not purchase a cheap company.

The bigger issue with Dyna International is the size of the company.  With only a $1.4m market cap the float is small and not many investors can build a material position.  The CEO even states in his letter to shareholders that the price is prone to fluctuate dramatically from the purchase of 100 shares, or $22.  With the low share price and lack of available shares it's no wonder investors aren't lining up to buy in size.

Even with the company's small size and mediocre business I think companies like this are worth a position when one can get enough shares.  The company is selling for 16% of book value and 21% of NCAV. At these prices there isn't much downside left, maybe something good will happen and shareholders will finally be rewarded.

Disclosure: No position