Monday, October 31, 2011

Coast Distribution On The Cheap

Sales of RVs and boats fell off a cliff during the recession, causing investor to leave many companies in that industry for dead. But while those companies which had too much debt have gone or will go under, the pessimism in this industry provides some opportunities for value investors. For example, consider The Coast Distribution System (CRV), a wholesaler of RV and boat parts and accessories.

Coast hasn't traded at a price this low since 2009. It is down some 40% from its 2011 high, as it fell with the market over the last few months, and continued to fall even as the market rebounded to some extent.

As a result, it trades at a large discount to its net current assets. While Coast trades for just $13 million, it has current assets of $50 million against total liabilities of $23 million.

Usually, a company trading at such a large discount to its net current assets would be losing money hand-over-fist. However, despite the industry challenges Coast faces, its income statement has held up rather well. After a $2 million operating loss in 2008, the company has shown operating profits of $1 million in each of the last two years.

Undoubtedly, the company faces near-term challenges as industry conditions remain soft. It is likely difficult to cut costs further without hurting revenues, as the company distributes a large number of SKUs. Also, part of Coast's liabilities is a debt level of $13 million, however this amount is not due for another three years. Fixed-asset requirements in this business are low, which has allowed Coast to pay down $15 million worth of debt in the last three years.

Those of you who avoid stocks with low liquidity won't like this one, however. Sometimes, the company's shares don't trade at all in a given day, and even on busy days volume is limited to a few thousand shares.

Coast basically breaks even right now because of tough industry conditions. As a result, investors are offered the opportunity to buy this company for a more than 50% discount to its net current assets!

Disclosure: Author has a long position in shares of CRV


John said...

How would you account for its $18.6m operating lease obligation? I can't make up my mind whether to treat this as real debt or not.

Saj Karsan said...

Hi John,

I would certainly call it debt, as I have before. But remember that it is also an asset.

Also, you can look at its term structure (are a bunch expiring this year or next?) to gauge whether management has some flexibility to potentially cut some of those costs where it may help cash contribution.