It’s a busy time of year from an earnings perspective, and the real world has gotten in the way of my normal posting schedule.

However, I’m pretty happy with the earnings results so far, as most of my current positions have performed well – some more so than others.

While one quarter’s (or even a year or longer in many cases) performance doesn’t make or break the merits of a selection, I continue to monitor my investment thesis closely for any signs of deterioration, whether from competition, changing market conditions, or other catalysts.

To be more efficient, I’m going to combine several earnings reports into a series of summary posts.

AMCON Distributing Co. (DIT)

Despite a challenging distributing environment and significantly higher energy costs, AMCON turned in a solid quarter.

Second quarter revenues came in at $206m, down 6% from $230m during the same quarter in 2010. The majority of this decrease was a lower volume of cigarette sales (down $18.7m) that was not offset by a corresponding increase in cigarette prices (up $5.9m).

Net income was $1.5m, down 12%, translating to quarterly EPS of $2.56.

While the income statement showed some pressure, management continues to strengthen the balance sheet.

Due to the nature of the DIT’s business model (i.e. extremely low margins, decent operating leverage), it was good to see the company pay off $5.8m in debt during the quarter.

More importantly, the company renewed its credit agreement with Bank of America – an absolutely vital lifeline for the distributing side of the business – for another 3 years on significantly better terms:

Management continues to take a long-term perspective, not only in expansion but in potential acquisition targets as well:

“We are delighted to have an enhanced credit facility that we believe will give us additional flexibility to take advantage of potential acquisitions and merchant opportunities …We are taking a long range view as we continue to make investments in foodservice, technology and related value added propositions designed to increase our customers’ bottom line… We are carefully evaluating new store locations in both of the regions we operate in. Our recent store opening in Tulsa, Oklahoma has met our expectations. Our niche in the retail market is well defined and we believe there is room to prudently expand…”

Sparton Corp (SPA)

After reporting tough second quarter results back in February, Sparton’s stock sold off sharply over the next few days, dropping almost 20%, despite reasonable explanations for the mixed results and several positive developments.

The confidence was vindicated with the third quarter results this week, as quarterly revenues shot up more than 30% to $50.3m, compared to $38.6m in the third quarter last year.

The new acquisition of Byers Peak is providing immediate gains – with further margin improvements possible due to the planned plant consolidation – and the EMS segment finally showed a big jump in margins as management focuses on profitable contracts.

This margin improvement led to the largest quarterly gross profit in over five years, with quarterly net income more than tripling to $2.5m, or $0.25 per share.

The turnaround is continuing nicely, setting up SPA for its stated (and very bold) goal of reaching $500m in sales by 2015.

Advant-E Corp (ADVC)

The company continues to chug along with steadily improving results. First quarter revenue was up 5% to $2.3m, compared to $2.2m in the same period the previous year.

Edict Systems, the amazingly-consistent SaaS growth machine, turned out another 2% revenue increase, but the big surprise was the Merkur Group with a 22% jump in sales.

Merkur was hit hard during the recession – even posting small losses – but the acquisition is looking better as the economy recovers.

Net income was up to $385k, equal to $0.006 per share, up 45% over the first quarter last year.

More importantly, the company announced another special dividend of $0.02 per share, payable in two installments during the remainder of 2011. The last special dividend was a big part of the original investment thesis.

By the end of 2012, the company will have returned $0.05 per share in dividends in less than two years – almost 20% of the current market cap – once again showing a commitment to rewarding “shareholders, many of whom are long-term investors in the Company.”

Gaming Partners International (GPIC)

I was very late in posting my viewpoint on GPIC’s 2010 financial results, as the company quickly followed up my post by announcing stellar first quarter earnings.

According to the press release,

“For the first quarter of 2011, the Company posted revenues of $17.8 million and net income of $1.7 million, or $0.21 per basic and diluted share. These results compare to revenues of $10.9 million and net income of $37,000, or $0.00 per basic and diluted share, for the first quarter of 2010.”

And backing up my thesis:

“The primary reason for the significant increase in first quarter 2011 net income was comparably higher sales of chips to casinos in Macau.”

As far as the company’s prospects for the rest of 2011, consider this:

GPIC’s first quarter EPS of $0.21 is roughly 40% of the company’s earnings for all of 2010, the 2nd best year in the company’s history, AND the first quarter is usually the slowest of the year.

While the company warned that the rest of the year will unlikely match these results, I think it bodes well for the annual outlook (and hopefully the stock price!).

Concluding Thoughts

I continue to look for ways to raise additional cash in the portfolio, as I remain skeptical on the overall market.

However, there are quite a few stocks, including a few international ones, that I am tracking closely. I’ve had 6-7 bids outstanding for many weeks, as I continue to remain patient about picking up shares in some of these illiquid issues.

I hope to showcase some fresh analysis over the coming months.

Make sure to stay tuned for Part II as more holdings report their results.

Disclosure

Long DIT, SPA, ADVC, & GPIC

GPIC continues to dominate the casino chip market worldwide, and will benefit from the explosive growth in gambling in Asia.

The economics of this business are solid, as GPIC’s products are ‘sticky.’ Consider:

– all new casinos need chips

– casino chips must eventually be replaced

– most casinos will tend to stick with a sole supplier for their replacements.

This also allows for cross-sell opportunities among the company’s other product segments.

While the business will generally be variable due to the timing of new casino openings, GPIC has maintained profitability and just reported much improved results for the fourth quarter and 2010 fiscal year.

Financial Information

For the fourth quarter of fiscal 2010, revenues increased 5% to $16.6m compared to $15.8m in 2009. Net income for the quarter came in at $1m or $0.12 per share, compared to $1.7m or $0.21 per share in the previous year.

Full-year revenues jumped 20.9% to $59.9m, driven primarily by the record-breaking third quarter, which coincided with several major casino openings in the U.S. market.

The company benefited from improved gross margin, increasing from 32.1% to 36.2%, as the company’s product mix shifted towards higher-margin Paulson chips and plaques/jetons (which carry a much higher price point: $3 – $20 for these European-style chips compared to $1 – $5 range for normal chips).

With this momentum, reported EBIT was $6.4m, up significantly from the 2009 figure of $1.2m, a number which was negatively affected by a $1.5m goodwill impairment charge.

Net income for the full year was $4.4m, translating into EPS of $0.54.

Balance Sheet

While company appears undervalued on an earnings basis, the balance sheet is a key part of the investment thesis.

Book value has increased every year since 2006, and the company now sits on $29.7m in cash and marketable securities. Of this amount, $18.1m is held overseas by GPI SAS, with the balance of $11.7m at GPI USA.

Even if the $18.1m overseas cannot be returned to the U.S. because of tax implications, there still remains significant excess cash in the U.S. operations, while still allowing the company to reinvest money back into the business on the international side (where much of the growth is coming from).

The company has paid dividends in 3 out of the last 5 years, with the most recent announcement in Dec 2010 for a special dividend of $1.5m, or $0.1825 per share.

In an unusual transaction, the company actually borrowed the money in order to pay this dividend, with the loan secured by certificates of deposit due later in the year. The details:

“In December 2010, GPI SAS borrowed 5.0 million euros (approximately $6.7 million in December 2010) to be repaid by July 2011 without prepayment penalty and at an interest rate equal to 50 basis points over the three-month Euro Interbank Offered Rate (EURIBOR). We incurred this debt to fund the payment of the $6.6 million dividend to GPIC in order to avoid liquidating higher yielding marketable securities.”

I applaud this move as a creative way to return cash to shareholders in 2010 without prematurely sacrificing returns on existing investments.

Growth Opportunities

If you’ve read my background, you might be able to guess that I’m very bullish on the prospects for casinos and gambling in general. China’s middle class is exploding – with tens of millions of people with newfound wealth, with gambling just one of the possible (but proven) outlets.

In December 2010, the company announced the creation of GPI Asia, in order to market existing product lines in this white-hot market.

Meanwhile, many states in the U.S. are stuck with gigantic budget deficits and are increasingly turning towards gambling as a way to raise additional tax money.

A few examples:

• States Continue to Feel Recession’s Impact
• A new proposal could bring five mega casinos to Florida
• Casino Gambling Mulled to Help Close Texas State Budget Gap

As the number one player in the casino chip market – and with an exclusive license in the U.S. for RFID technology for at least the next few years – GPIC is uniquely positioned to capitalize on this growth.

Valuation

Recent results do not materially change my original valuation estimate, as the stock still appears undervalued based on current and future earnings.

Even with the most conservative assumptions for DCF and EPV, I find it hard to come up with a value less than $8-9 per share.

At current prices, the stock is trading at with an EV/EBIT multiple of 5.3x and EV/FCF of 6.5x.

Compare 2010 financial results to 2006:

2010 financials are roughly 20% lower than 2006’s record year, yet the company’s current enterprise value is 75% lower than in 2006, when the stock price was almost $18 per share.

Conclusion

2010 was definitely a great year, arguably the second-best in the company’s history, and yet the stock trades at one of the lowest multiples in its history.

This is despite the fact that the business is earning double digit returns on equity, to go along with average ROIC and CROIC of 17.7% and 24.4% respectively (the business is cyclical however, so short-term results can swing wildly).

The company has grown book value by 11% annually for the last ten years, and now sits on a significant cash balance that can fund additional growth or used to reward shareholders in the form of dividends or buybacks.

Going forward, I see two positive outcomes:

– Mr. Market reawakens and values GPIC at a more appropriate multiple

– The company returns some of the excess cash to shareholders if management cannot find a way to reinvest it at a satisfactory rate of return

The recent purchase of GPIC’s injection mold supplier – while not material – seems to be a good move to consolidate the supply chain and shows that management is looking for ways to utilize this excess cash.

Meanwhile, the appetite for casino gambling will only grow – and the market for casino chips along with it.

Check out my original post on Gaming Partners International (GPIC.OB), as it contains much of the background information on the company.

Disclosure

Long GPIC

International Baler Corp (IBAL.OB) is manufacturing company that has been in business since 1945 and currently qualifies as a net-net stock investment.

The company manufactures baling equipment, large complicated machinery that compresses a variety of materials (including scrap metal, boxes, cans, etc) into bales for easier shipping, storage, and recycling.

A leader in the field, especially for made-to-order and customized baling equipment, International Baler has over 40,000 units installed worldwide.

The stock suffered through a rough 2009 (along with many heavy equipment manufacturers) as customers put off cap-ex purchases – the company’s products cost between $4k and $500k.

A micro-cap stock with a market capitalization of only $3.5m, IBAL’s balance sheet remains rock solid, and the stock price has barely moved despite strong evidence that financials are strengthening in a big way.

Company Financials

After 6 years of steady growth in revenue from 2002-2008, IBAL saw a sharp sales decrease in 2009, with sales dropping 48.4%. The company suffered a small net loss, its first since 2003, as orders for every type of product were down across the board.

IBAL bounced back in 2010, with revenues up 16% and profits coming in at $254k.

Gross margins have remained steady over the past 5 years with a median just under 20%, while both operating and net margins hover around 5%.

For the year, these results translated into an EPS of $0.05 and owner earnings of $336k, for a CROIC and FCF Yield of 13.84% and 17.3% respectively.

2010 ROE was only 6.46%, as the company has consistently stockpiled cash to go along with an unused $1M credit line.

Overall, IBAL is a company that has gone about its business for over 50 years – although the recent recession affected the numbers in 2009, the company has proven it has the power to stay afloat during tough times.

Quarterly Analysis

Although it will probably take some time to match 2008 levels – a banner year – the latest quarterly reports show signs of improvement, not only in the actual numbers but in management’s language.

From the Q1 report last year:

“The decrease in revenue is the result of lower shipments in the first quarter of fiscal 2010, reflecting the deteriorated market conditions and lower commodity prices for recycled materials compared to the prior year first quarter”

And the latest quarter:

“This increase in revenue is the result of higher shipments in the first quarter of fiscal 2011 reflecting the improved market conditions and higher commodity prices for recycled materials compared to the first quarter 2010… The market for baling equipment has been moving toward larger, more productive and efficient equipment in recent years.”

This movement towards larger baler equipment is a good sign for the company, as there is much less competition on the high-end products (along with higher margins as well).

The recently released Q1 results show another sales increase, up 18% to $1.8m compared to the prior quarter last year.

Pre-tax income increased to $68k, compared to nearly zero last year, benefiting from higher product shipments and continuation of the company’s cost reduction efforts in 2009.

Even better, IBAL’s sales backlog more than doubled to $3.2m compared to $1.59m in 2010.

For comparison purposes, the backlog on Jan 31, 2008 was $2.8m – a year in which the company had sales and EBIT of more than $12m and $1.2m respectively!

While the company likely won’t approach those results, it has definitely gotten off to a good start in 2011.

Yet, despite the positive outlook, the stock has barely moved. In fact, it now trades at a discount to its working capital – compare the market cap $3.5m to net working capital of $3.68m.

Cash now sits at $3.08m, or $0.62 per share, unencumbered by any debt.

So IBAL is currently trading for less than working capital despite being solidly profitable, earning decent returns on capital, and announcing a record backlog!

Risks

Insider Ownership

Company insiders hold 58.8% of outstanding stock – I like to see management have a stake in the business but am cautious when the stock is so closely-held, as management can set compensation and make decisions at the expense of minority shareholders.

Digging into the latest proxy statement, the husband and wife team of LaRita & Leland Boren collectively own 51%, giving them tight control over the future of the company.

Outside of the Boren’s, little stock is owned by other company insiders or directors.

Recessionary Pressure

The company’s short-term results are heavily dependent on the economy. As commodity prices rise, it becomes more attractive and economical to purchase recycling equipment such as balers.

While the economy is showing signs of growth, a double-dip recession could reapply pressure to IBAL’s customers, potentially delaying purchases into the future.

Employee Lawsuit

On August 26, 2010, IBAL was served with a wrongful death lawsuit from a former employee for events that had occurred back in 2008. The lawsuit is asking for $2.5m, a huge potential liability for a company this small.

Lawsuits can be fickle and the company has liability insurance that should help cover any losses, but these sorts of cases can take a great deal of time and resources away from day-to-day responsibilities.

Positives

High-end Custom Baling Equipment

These special order products can cost up to $500k and offer much higher profit margins than traditional equipment.

These special orders remain a key growth segment for the company going forward – with such a wide array of configurations and over five decades of experience, the company is well positioned in the marketplace to capture the trend towards higher-end and custom equipment.

Undervalued Assets

The company owns its manufacturing facility in Jacksonville, FL, situated in a prime location next to a railroad and near a major highway. The facility is 62,000 square feet and sits on 8 acres.

With no mortgage, the company has depreciated the land, building, and all its contents down to $795k.

The land and buildings should be worth substantially more than the current carrying cost. Here are a few comparables:

Assigning a rough estimate at $30/sq ft to IBAL’s facility would yield a comparable value of almost $1m more than the current carrying cost (just for the building and land) – that’s almost $0.20 per share of additional value.

While it is unlikely that the company would sell the facility anytime soon (in fact, they had plans to expand the operation at one point), it is still a significant consideration for a company with a market cap of only $3.5m.

Insider Buying

John Martorana, a newly elected director, purchased almost 20k shares in the fall of 2010 at prices ranging from $0.45 – $0.52.

While the dollar value isn’t significant, insider buying is nearly-always a good sign for future prospects.

The CFO recently exercised his options and now holds 250k shares – it will be interesting to see what he chooses to do with this newly acquired stake in the business.

Valuation

There is no doubt that the stock is cheap on an asset basis – book value sits at $0.927, so the stock is trading at a P/B ratio of 0.75x.

Using Graham’s definition, the stock is a net-net, trading below its NCAV of $0.74.

Typically, these figures provide a measure of protection by limiting risk on the downside in the case of a liquidation.

Using TTM figures and the recent $0.70 stock price, IBAL trades for .75x EV/EBIT and only 1x EV/FCF, making it one of the cheapest stocks I’ve ever seen.

Consider this:

If the current sales and cash flow trend continue, the company will generate more owner earnings in a single year than the entire enterprise value of the company.

Conclusion

I’ve been purchasing shares for the past several months under $0.60 – basically picking up a piece of a growing, profitable business for less than the cash on the balance sheet.

At that price, the company actually has a negative enterprise value, meaning the market thinks that the baling business is worth more dead than alive – and yet it is very much alive.

Book value has compounded at 22% per year since the Boren’s took over in 2005, and the large jump in backlog should forecast good things in the coming months.

With a solid balance sheet, competitive products, and undervalued assets, the company is ripe for an acquisition or merger.

Tragically, LaRita Boren passed away in February 2011, meaning her ownership stake passes to an Estate controlled by her husband, Leland Boren.

Leland Boren, now 87, not only controls IBAL, but is also in charge of Avis Industrial Corporation, a conglomerate of industrial companies including one of IBAL’s competitors, American Baler Corporation.

With the recent passing of Mrs. Boren, and the advancing age of Mr. Boren, estate planning is surely a consideration – I think the company is now poised to unlock shareholder value via a number of different catalysts – whether it is a merger with Avis Industrial or an outright sale.

Long term, the increase in fuel prices and other commodities, along with greater awareness and acceptance towards recycling, will only increase the need for the International Baler’s products.

At current prices, IBAL represents one of the most undervalued stocks I’ve ever seen.

Disclosure

Long IBAL

Other Articles on IBAL

Bailing out of the bailed out market and into International Baler (Ragnar)