Wednesday, September 23, 2009

Consumer Meltdown, Or Temporary Lull?

While the cash for clunkers program did provide consumers with a temporary incentive to open their wallets, consumer spending is expected to remain tepid over the next few months. Consumer confidence is low, unemployment continues to rise, and consumers are increasingly using their incomes to pay down debt. As a result, the market has punished many stocks that sell leisurely consumer goods. But conditions like these tend not to persist for long. In the meantime, investors are offered the opportunity to buy such companies for what appear to be tremendous discounts to their intrinsic values.

Consider Adams Golf (ADGF), designer and distributor of golf clubs. The company has lost money in three of the last four quarters, as customer inventory reductions and reduced consumer demand has caused revenue to drop significantly. But is the company in such dire straights as to warrant its current market valuation? You be the judge.

ADGF trades for just $19 million, but has current assets of $50 million versus liabilities of $14 million, which includes just $5 million of debt. Due to Mr. Market's obsession with current earnings, ADGF offers investors a chance to purchase a cash flow positive (referring to second quarter cash flow from operations) going concern at a discount to its liquid assets.

It could be a while before consumer spending returns to levels where Adams Golf can once again generate net income of several million dollars per year. But with the stock price at this level, investors don't need that to take place in order to make money. As the company aligns its cost structure to the lower level of demand, it will likely return to profitability in the near future, rewarding investors who focus on the long term and who cover their downside risk by purchasing liquid assets with a healthy margin of safety.

Disclosure: Author has a long position in shares of ADGF


Sr said...

How much do you value this company? It's earnings have been weak since 2001?

Munidude said...

I did a quick liquidation analysis and got to 2.53 a share. Is that close to where you are seeing things?

Unknown said...

As always great article, I love that you're always looking to buy when "blood's in the streets "
Interesting, looking at my google docs, I did a cashflow analyisis of ADGF 11 June 2009 figured they were worth about $6 a share or so. Didn't do a liquidation analysis.

Seeing as you have write about so many companies, where do you rank the various ones(is this your best idea or 50th best)

btw I've been emailing Alliance Semiconductor ALSC and got this link today
they report a $53.5million other than temporary impairment on their AMBAC preferred shares.

Did you write about them a while back?

Saj Karsan said...

Hi Sr.X,

You are right, returns on equity have not been strong lately. But it's important to consider what that equity is for sale for. Currently, you can buy that equity for cents on the dollar.

Hi Munidude,

I haven't done a liquidation analysis since I don't expect a liquidation. I also don't share valuation numbers, but rather discuss some of the relevant items a value investor might consider.

Hi Prince,

Thanks for the kind words.
I have a hard time knowing how to rank companies...hopefully that's something I'll get better at!
I don't think I've written about that company.

Anonymous said...

What do you think about the various legal proceedings against the company, including former directors and even the company's underwriters as defendants claiming "gray market sales" impacted long-term profits?

Jonathan Goldberg said...

Where do you see them as cash flow positive? I see Q2 cash from ops as -8.86 according to a quick look at google finance.

Saj Karsan said...

Hi Anon,

That is certainly a risk. However, ADGF does carry insurance. From the looks of it, even if they lose two separate, important cases, it looks like they will be out about $5 million.

Hi Jonathan,

It would appear as though you are looking at H1 cash flow, not Q2. H1 includes Q1, where working capital expanded due to reduced demand.

Jonathan Goldberg said...

Indeed. Thanks!

So did you just notice that H1 increased vs Q1 or is there any way to see just Q2's cashflows? To the best of my knowledge it is not reported separately.

Unknown said...

Oops sorry I think that might have been a valueinvestingclub write up on ALSC. Apologies

Anonymous said...

Another point to consider is that the second quarter is the seasonally strongest of the year for them. Can we expect positive cash flow in the coming quarters as well?

Saj Karsan said...

Hi Chris,

Yeah the best quarter of the year is behind us, but because of the strong balance sheet, I'm not sure there's any reason to worry too much about seasonal fluctuations going forward.

Hi Jonathan,

Yeah I don't think Q2 CF is published separately, but it's easy enough to calculate yourself.

Floris said...

Hey Barel,

Completely agree with you on this investment. Bought it myself 3 months ago. Not only is it trading at a steep discount to NCAV, it also makes great clubs. I play golf and love the hybrids, as do my direct family members. Moreover the recent 2nd place finish of tom watson should help boost medium/long term profit. Its strange that you are able to buy liquid assets at 50 cents and get a company which makes good products as a bonus.

optionsnut said...

Nice article as usual. I found this a while ago, along with other similar companies. I drifted more towards ALDA however over this company. Not as cheap on a net or liquidation basis, however they aren't burning as much cash and have had much higher earnings in the past which may set them up for a much larger jump in a few years... if consumers spend!

Please let me know thoughts on ALDA when you've got time.


Saj Karsan said...

Hi Options,

Reyer actually picked up on ALDA last year, you can read his thoughts about it here:

optionsnut said...


i caught all that he put into that article. I found ALDA via a random screen about the same time and saw Adams while comparing.

Both would be great investments if only they could earn some money or atleast not lose so much.

Reyer mentions in his post another article he will write about ALDA. I searched forward and couldn't find it? Do you have that link too?


Saj Karsan said...

Hi options,

I only see the one article myself.


optionsnut said...

Yeah oh well.

Hey if your bored, which i doubt you are, have a look at cwi.un.

At quick glance it looks terrible, but digging deeper it could have some potential. Negative tangible book value, but if you add back amortization into earnings they have a p/e under 2.

Seems like they are just cannibalizing themselves by continuing with large payouts. Debt looms large, but is managable if they reduced payouts to about half where they are right now.

Steay and stable revenue/earnings past few years (actually grew slightly without adding debt or shares).

I have yet to figure out by sifting through past annuals to see if they mention how long till they have to replace a large portion of tanks or if its ongoing so it doesn't hit all in a few years.


Saj Karsan said...

Hi Options,

It does indeed look more interesting with the intangibles add-back. But like you say, the actual replacement cost timing is hard to say. It also looks like they are getting beat by the competition, and yeah the debt load is rather large, with some of it coming due rather soon.

Iowa said...

A Christmas Story: Last year about this time I pondered the idea of part ownership of Adam's Golf. Some studying of their latest 10-K, listening to quarterly calls, and talking with friends at a Bachelor party out on the golf course this summer as to why they had an Adam's Golf product in their bag were some of the ways I got to understand the company. It was obvious then, as in now, the difference between the going market price and its value as a bargain security. Throw in a couple members of the board with some experienced background and a sizeable stake in the company just as some icing on the fruitcake, for what its worth. So, here I am one year later. I did, indeed, cease my pondering and bought in at a price I felt held a margin of safety last December. Yet, the appreciation on this security is minimal compared with most of the alternatives I have had since that time. As an investor with only a few years under my belt, this specific security has me deep in thought once in a while, perhaps only due to the time factor seeming to work against me. However, I’m not sure for good reason. Other than the fact that the price hasn’t changed ‘much,’ it still possesses a margin of safety one could argue as appropriate. I see this as my chief focus. The challenge of fighting time, I believe I’ll leave that to the birds.

Open to discussion…