Thursday, December 15, 2011

Champion Gets Battered

Shares of small-cap Champion Industries (CHMP) are dropping fast. The stock is down more than 60% from its April high and as a result it trades for a P/E of just over 3.

Champion operates in three distinct industries: printing services (for brochures, pamphlets, company annual reports etc.), office products/furniture, and a town newspaper. Check out the 10-K for the breakdowns by segment, and for more information about Huntington, West Virginia than you'll ever want to know.

Despite operating in these rather competitive and/or battered industries, the company does turn a profit. By keeping capex low, Champion has also managed to generate cash flow that is significantly higher than its net income. And it's a good thing it has, because it has allowed Champion to pay off a lot of debt, which is the main risk to this company.

Champion now has $50 million of debt and a market cap of just $8 million. In the last three years, the company has generated cash from operations less capex of about $25 million, and it has used all of that money to reduce its debt. If it can keep doing this, shareholders at the current price will likely be very-well rewarded.

But the problem is that revenues are declining, so management has to continue to find ways to cut costs to keep cash flow up. On that front, management is very much aligned with shareholders; Champion's CEO earns just $1 per year with no bonus, and owns 47% of the company's stock.

This is a high-risk, high-reward situation, as Champion is a levered up company which may or may not have the future cash flows to deliver outstanding returns to shareholders.

Disclosure: No position

1 comment:

pbrace said...

does their debt trade or is it bank debt? might be worth a look...