Saturday, July 3, 2010

International Baler Quarterly Filing Thoughts.

After having a few days to think on the 15 pages that make up the most recent International Baler (IBAL) 10Q I am just as happy with the results as I was when I saw them yesterday. I was happy to see that the company had better results than I had originally expected.

The day after the release, I was surprised that no shares changed hands, and the bid/ask spread stayed roughly the same. Regardless, here are some brief thoughts.

Income: The company earned 2 cents a share; which, if extrapolated to 4 quarters, gives the company a super reasonable P/E of ~7 1/2. I will be absolutely shocked if the company can get to fiscal 2008 revenue/earnings, but 2007 seems reachable in the coming quarters; if that happens, we can expect a super low P/E of 5; it seems irrational for the market to value the company in such a way, especially in the low interest rate environment that we are in.

Cash Flow: While cash flow was negative, it was offset by increased inventory and accounts receivable levels over the last quarter. I view these 2 increases as close to money in the bank, and a show that revenues in the next quarter will be bolstered by the increased in inventory levels.

Balance Sheet: The company presently has cash of $1.25 million against a market cap of $2.9 million. In addition, when comparing customer deposits to the last quarter, they swelled by over 400%; from $107K to $445K this is a very good trend for the company, and is certainly a symptom of the the recovering economy. It sheds some light on coming revenues; which will undoubtedly be healthy, especially if the economy continues to improve or even putter along.

One of my favorite facts about the company is that it has a balance sheet that could take years of record low revenues; such as the ones that occurred in March of last year, when the bottom of the world fell out.

Sarbanes Oxley Risk: Here (thanks to Alex for passing the article along to me) and here, we see that Rep. Barney Frank expects for small public companies to remain without some of the burdensome costs of Sarbanes Oxley. I suppose that this makes me feel better since almost all of my stock holdings are in nano-caps; but, even if lawmakers would hurt them, I would imagine that companies would implement some form of reverse share split, get below 300 shareholders, quit filing with the SEC, trade on the Pink Sheets, and ultimately save some money.

Regardless of what happens with the legislation, it probably doesn't matter much, either way; I can't imagine that OTC investors would be scared away by their stocks trading on the Pink Sheets. Furthermore, if legislation doesn't force tougher audit laws, then we are essentially where we are now. The only foreseeable result of this that would piss me off would be if the company was taken private with some super low ball offer that values future cash flows at nothing, much akin to what the Steiner Family attempted to do with Dry Clean USA (now, Envirostar). I doubt that this would be able to happen though, since the company would probably lose it's NOL's.

Frankly, this company offers a TON of upside with minimal downside. It is likely, in the event that the company would liquidate, it would end up returning money to shareholders. While I don't want for or think the company will liquidate, it is a way of seeing the safety in the investment. In light of there being no litigation against the company, a chunk of cash, adjustable SG&A, real estate on the books, insider buying, and owners/operators/board members that are business savvy, I reiterate what I have said in the past: I see no reason why this company is not trading at book value. This company is exactly the sort of thing that Warren Buffett would have invested in back in the partnership days.

For those of you that want some more info on balers check out the stuff here.

Disclosure: I am long shares of IBAL. This is not investment advice. Do your own research before doing anything related to anything I talk or even so much as think about.

5 comments:

Robert Pio Molloy said...

I agree with everything you've said. International Baler is clearly trading at a ridiculous price. When I do my screeners, International Baler is valued at the same level as fraudulent companies, pump and dumps, and banks have been shut down by the FDIC. The price suggests the company is about to go out of business. Are revenues falling apart? No. Is the company over-leveraged? No. Is the macro environment unfavourable? No. Is management robbing the company blind? No. When you look at the company over a 5 year period, you can clearly see that book value is increasing (~30% annually), revenues are growing and cash flow is tipping away quite nicely. As you've shown, the current PE is a mere 7.5, the market has decided that International Baler has no possibility for growth, and if anything, it's going to contract. I think we just need to be patient on this one. If things just keep going the way they have been, then there's no reason why we can't go to $10 million of revenue and increased profitability. That's the beauty of buying this company at this price. Everything suggests that all we need to do is just sit on our asses and wait for intrinsic value to return.

By the way, are you still a Dataram stockholder? I held a little but recently got out (with my shirt on just about). I am slowly coming around to the way of thinking that I am simply better off without these problem companies. It's incredible that Dataram management continue to enrich themselves as the business collapses and the company burns through more and more cash. I want to partner with more Leland Boren's, and less Roger Cady's.

jeff said...

Robert,

Always a pleasure to hear from a fellow shareholder (and intelligent blogger)!

A lot of the increase in book value came from the company adding it's NOLs to the balance sheet, but regardless, things are getting a lot better. The company is run buy an intelligent and super nice guy; Roger Griffin.

After having met with management, I would not be shocked if the company generates revenues well in excess of $10 million.

Having never spoken with the Borens, I have no real opinion of them, other than what I have read.

I would really like to see there be a share repurchase of, say $200K, made in the form of a dutch tender offer. It would do a lot to help the company increase it's intrinsic value and would deploy some of it's hoard of cash.

I sold out of DRAM a long time ago, when it was obvious that management was not only obtuse, but, inept. I am always shocked to think that the company is sooooooo much less healthy today, than when I was an owner, but, the stock price is roughly the same. I made a little bit of money out of it, but, not as much as I should have. Oh well! I look forward to see how long the company will be solvent, or if they will right the ship.

Ned said...

Jeff,

Very interesting company indeed. What do you think about below (from their latest 10Q)?

On August 26, 2010, the Company was served with a wrongful death lawsuit filed by the Estate of a former employee who was injured in a workplace accident while an employee of the Company. The accident occurred in September 2008. The Plaintiff has demanded $2,500,000 to settle this claim. The Company intends to vigorously defend this case and has contacted its liability insurance carrier to request defense and indemnification of any losses incurred in connection with this lawsuit. The claim is currently in the early stages of discovery and the outcome is uncertain.

Best,

Ned

jeff said...

Ned,

I am not overly worried, and am still long IBAL.

Dennis The Menance said...

It is not nessessary to invest in high risk securities to get great returns.