Tuesday, August 18, 2015

Do You Love 179% Annualized Returns? Check Yes Or No.


  • Net-Net AG&E Holdings has successfully restructured the business
  • Management is about to reward shareholders with a cash distribution followed by sale that should represent return of 179%+ annualized
  • When, what, and how was clearly discussed in the last earnings call. The market is discounting the what
  • Cash nearly equal to share price + ongoing concern value means downside risk is minimal

AG&E Holdings, née Wells-Gardner Electronics, WGA makes electronic widgets. Specifically they make and service electronic widgets in the casino industry. They have been in the electronic widget business since 1925. Yet by 2013 they had hardly any cash on hand. They also had hardly any debt on hand. This was the case every year from 2010-2013. It must have been incredibly frustrating to put $50M in one end of the funnel and have $0 come out the other.

I use the term widget to describe AG&E's business because it really doesn't matter what AG&E does or did. What matters is they have a lot of cash and receivables on hand. What matters is they successfully restructured the business. What matters is that they intend to return much more than the current share price to shareholders and intend to complete the return very soon.

Management recognized the Sisyphus-level torture of pushing a boulder up the hill every year only to have it roll back down again with zero return. In late 2013, management sought "strategic alternatives" for the business. Normally I view "looking at strategic alternatives" in about the same light as executives "pursuing other opportunities."

In the case of AG&E they did execute a strategic alternative - divest the legacy widget business and generate a huge pile of cash. Along the way they managed to set-up a business model that is profitable - if they don't have to pay a stock market listing fee. An example of their commitment to profitability is the CEO taking a 50% pay cut. CEOs take voluntary pay cuts about as often as Nigerian princes meet their wire transfer commitments.

As of the earnings call on 8/7, AG&E had $9.4M in cash. This number is expected to shortly reach $10M once the final sale of legacy widgets is closed. With 11.68M shares outstanding that is about $.86/share against a closing share price of $.89 on 8/14. Normally with a net-net you might say "So what? Value trap, value trap, value trap!"


There are two catalysts on the near horizon that make AG&E a value release:

1.   On the earnings call CEO Tony Spier stated the company will return a "significant cash distribution" to shareholders sometime in the next two weeks or by 8/21. This distribution was implied to be $.5/share based on a comment in the Q&A.

2.   Spier also agreed that they expect to close sale of the company in the next few months and have more than one buyer interested.
There are two big events coming up, investors have been told when they will occur, and it's soon. The remaining question is what AG&E is worth beyond the cash?

Adjusting the 10-Q Balance Sheet for comments on the earnings call:

$10M Cash
----------
$1.4M Receivables
$640K Inventory
$240K Prepaid Expenses
----------
$2.28M Non-cash Current Assets
($1.50M) Liabilities
----------
$780k Net Assets Ex-cash
Or
$.07/share
Less
$.02 Contractor Contingency (bad AR, inventory write-down)
-----------
$.91/share balance sheet value

If you are one of the few and the proud, or the one and the proud, that made it this far, I can feel your impatience to generate an angry comment. "Well, Mr. Smart Guy, where's the annualized return on $.02?!?? Value trap, value trap, value trap! Good day to you, sir!"


According to the CFO, Renee Zimmerman, public listing costs AG&E around $500-600K a year. According to Tony Spier AG&E's restructured business can generate $8M/year in revenue and would be profitable if they did not have to pay the listing fee. The great news for investors is an acquiring company can ignore this fee in valuing AG&E since they will either be private or will already pay a listing fee. The ceiling for profitability is around the cost of listing or $500K. To keep it simple, splitting the difference gets you $250K/year in profits. How much would you pay today for $250K a year for the next 15 years?

NPV = ∑ {Net Period Cash Flow/(1+R)^T} - Initial Investment


Fortunately there are plenty of internet tools that quickly spit out $1.7M, or around $.15/share, as the value of 15 years of $250K profit at a conservative discount rate of 12%.
$.91/share balance sheet value + $.15/share future cash flows value =
$1.06/share intrinsic value of AG&E, 19% higher than current market price of $.89/share
The market is completely dismissing the value of AG&E as a going concern. Which maybe wouldn't matter if there wasn't a sale clearly on the horizon.

From the earnings call:
"Benj Gallander - Contra the Heard
Okay. That kind of indicates to me with ongoing operations and close to a dollar a share in cash, that if the organization is sold, you should be able to get north of a dollar a share for it. Does that make sense, no debt too?
Tony Spier - Chairman, President, and CEO
I can't comment upon your analysis. The numbers are clear though..."
Later in the earnings call:
"Benj Gallander - Contra the Heard
So do you have some companies that are interested in possibly buying the company?
Tony Spier - Chairman, President, and CEO
Yes.
Benj Gallander - Contra the Heard
You do, okay. And you have more than one?
Tony Spier - Chairman, President, and CEO
Yes.
Benj Gallander - Contra the Heard
Okay. So there's a realistic possibility that something might be completed in the next few months.
Tony Spier - Chairman, President, and CEO
That certainly would by [be my] expectation."

Too long, scrolled to the end to tell you why you are wrong and should buy an oil rig instead summary:
An investor can expect to get back at least $1.06 on $.89 invested within two months through a combination of cash dividend and company sale. Management is credible based on actions. 19% over two months annualized is 179% return.