ADF Group (DRX) designs and builds steel structures for the non-residential market. This company operates in a very cyclical industry, as it is reliant on a construction industry that is in no mood to build as a result of the recession. But market pessimism has pushed this stock to a price to book value of just 0.66, despite the fact that it has remained profitable throughout this downturn!
ADF had some rough years following the last recession in 2001, as its capital structure was far too aggressive (i.e. it had too much debt). As we've discussed in the past, cyclical companies should not carry a lot of debt. Since then, ADF has added some equity and reduced its debt, resulting in its current net cash position (cash minus debt) of $10 million.
Subtracting the net cash position from the company's market cap suggests the market is valuing the company's remaining assets at $50 million. But this is a company that has earned operating income of $57 million in just the last four years. Yes, the next couple of years will be slow, as the market for steel structures is not exactly booming. But the company is in no danger of going bust. When the industry returns to normal, ADF is in a position to return to growth.
There are a couple of caveats worth noting, however. The shareholders who control the company don't have a financial stake commensurate with their controlling stake. This results in misaligned incentives, as discussed here. Also, the level of customer concentration is high, with two customers making up more than two thirds of the company's business of late. High customer concentration adds to a company's risk level.
Undoubtedly, investors are afforded the opportunity to buy this company's assets on the cheap. However, it is not known when the market for this company's services and products will turn positive. But the company has a financial position (more cash than it does debt) that will allow it to outlast this downturn, potentially rewarding long-term investors in the process.