Monday, February 1, 2010

Bailing out of the bailed out market and into International Baler.

As anyone that knows me, emails with me, or even reads this blog will know; I am nervous about the health of the US economy (partly due to a huge budget deficit) and will be shocked if the market went up in any significant amount of real dollars. With this said, one company that I am enthusiastic about is International Baler (IBAL.OB).

The company has an balance sheet that has been significantly reducing liabilities in the past year, as they have precipitously fallen from $2.29mm to a mere $886K- and gone back up a hair, to 1.06mm while this has come with the price of the company reducing it's cash position, there should certainly be enough to cover all the company's needs for quite sometime.

Most attractive about the company is that they sit on nearly $1m in cash, just under $1m in receivables, and a fair amount of inventory- which is at a historically low level. As an example of the company's balers being of good quality and holding value, here is a youtube video of an International Baler baler. While the people selling the used baler are asking $6,600, from emails with the company, I found out that the baler in the video was made before 1981, and was sold for between $6k-$7k. In addition, the baler is now considered to be out dated and not the sort of thing that customers want, as they want bigger and faster balers. Due to it selling for the same price, in nominal dollars, I feel pretty safe in assuming that the balers the company has on the books, are more or less worth what they say they are... at least, in the long run.

Aside from this, we can look at the cost of their revenue over the past 4 quarters and see that, all things equal, it would essentially take them a single quarter to pawn off all of their inventory. I am certainly not concerned about their inventory being bloated or overstated on the balance sheet as a result.

Property plant & equipment is valued on the balance sheet at $871K, while, the count assessment their manufacturing facility is $700K. The facility is huge, close to rails and interstate, in Jacksonville, as can be seen here:


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In the previous 4 quarters, the company has lost money and is generating lower than normal revenues. However, when looking at their expenses, they could have ABSOLUTELY NO revenue for nearly the next 4 quarters and still pay SG&A expenses (at last quarter's rate) before eating through all of their cash. In the unlikely event that their earnings turn into a complete representation of their cash flow, they have well over 2 years worth of cash before they have to sell off any inventory, collect accounts receivable, or even sell off their factory. In the event of a significant cash burn, they do have a credit line that they can access, which is secured by their assets (most notably, their factory). Personally, I view this as an unlikely scenario. I certainly won't be shocked if the company is profitable in the near future.

In regard to the future outlook for the business, the company is attempting to position itself to sell more high margin custom made balers, which should continue to aid them in reducing their standing inventory. Last quarter, with revenue of $1.69mm, where as, a year ago, they generated $3.34m in the same quarter. As revenues have fallen off, they have adjusted their SG&A, taking it to $277K and $275K, from previous amounts of $345K and $429K per quarter. Future earnings will be ever the more significant, as there are significant net operating loss carry forwards on the books, which don't expire for a very long time- as such is the case, their tax liability will be minimized, thus, increasing free cash flow of this already cash rich company.

Insiders own a significant chunk of the company, and have a ton of experience in the baler industry, in addition to International, they also own the privately held American Baler. A guy in Connecticut by the name of Alexander Toppan, who seems to have historically successful experience in nano/micro caps also owns a chunk of the company. Quite literally, well more than 1/2 of the company is owned by people that will in all likelihood not sell their shares for any meaningful amount of time, as they are insiders who have not traded the stock very much. Due to the age of some of the founders of the company, who also control a huge amount of the shares, I wouldn't be surprised if they would try to do a merger or sale of the company as they will be having retirement/estate needs. After all, the NOLs, real estate, in place management (not made up of the founders), and cash position do a lot to tempt a potential acquirer to 'chomp at the bit'.

While the company is certainly not having exceptional operational results, it is selling for significantly less than it should be, based on balance sheet analysis alone. If there is any sort of economic recovery in the cards, then the current share price is ever the more attractive. They have managed to turn a profit in the previous quarter, and as the economy has seemed to grow, I all but expect that they will have another quarter or two of profitability in the near future.

From where I sit, if there is any real amount of economic viability for this business in the future (which I think there is), even if there is no chance of a buyout, there is no reason that it shouldn't be trading for at least book value. Presently, it is at a little more than 1/2, and is more or less a classic Ben Graham net-net.

Certainly, I am leaving out a lot of my thoughts on the company to let you fill in your own blanks with your own research... Read some of their reports from the last recession, they are an interesting read- you should also look at their executive compensation and auditor for some more intriguing stuff.

Disclosure: I am long International Baler. This is not investment advice, and as such, is not a recommendation to buy or sell anything. Do your own research!

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