Tuesday, July 22, 2008

Buy Inventory at a Discount!

On my visit to Omaha a few months ago (discussed here), one of the things Buffett said to us which stood out for me was that there are many companies out there that are undervalued, but you've got to look for them, because no one's going to tell you about them.

H. Paulin is a company nobody is going to tell you about (well, except for us, to illustrate an example). It has a market cap of just $25 million, and distributes and manufactures bolts, nuts, screws and other such components. It's small, it's boring, and therefore it's on no "analyst" or institution's radar screen.

But is it undervalued? To illustrate, I've highlighted a few items from its latest balance sheet (numbers are in thousands):

Accounts Receivable...............24,405

Total Liabilities........................40,833

So the company trades for $25 million, but if it did nothing but collect A/R, and sell off its inventory to pay off its debts, it would provide its owners with $40 million! Plus, you would be getting all its land, buildings and manufacturing equipment in addition to that!

Of course, you never want to leave an analysis at that. As pointed out by Reyer here, you'll want to make sure to read the notes to the financial statements to make sure you understand what's going on in the company. Paulin's manufacturing operations are losing money, as their car part manufacturing customers have had to cut back due to the problems of the Big 3 US automakers.

But not all the news is bad. The distribution business is growing, as evidenced by increasing sales amid a new contract with Home Depot, as Paulin is stealing market share. Recent profits in this division are down in the short term as Paulin has had to increase its investments in Home Depot's retail locations as part of its share growth.

So all in all, the company pretty much broke even in Q1. Companies trading at discounts to what looks like real realizable value get us excited about investing! Paulin looks like it may be one of those companies.

Disclosure: None


Anonymous said...

I found this post very inspiring. I definitely remember a similar strategy from " The intelligent Investor" for idenifying bargain stocks trading below their net working capital minus all the liabilities.

TJF said...

Is this company public or private? I see a SEC filing for a Paulin company that was filed in 2001.

Saj Karsan said...

Hi Eric,

It is indeed public: http://finance.google.com/finance?q=paulin&hl=en

But it's Canadian so it doesn't file with the SEC, its filings can be found at sedar