Friday, October 13, 2006

Avalon Holdings (AWX): Value in the Sum of the Parts? Trading at Twice NCAV
This marks the first in a series of research pieces on companies trading at twice net current asset value.

Tiny Ohio based Avalon Holdings hit our radar again the other day. We were intrigued by Avalon’s interesting combination of assets and cash a few years back, but lost track of the company. So many companies, so little time. Upon taking a recent look, we believe that there may be unrecognized value within.

Even with a market cap just north of $26 million, institutions own about 1/3 of Avalon. However, you won’t find any analysts covering the company. There simply isn’t enough Avalon to go around in order to generate interest from the analyst ranks. (Yet another recurring theme with the companies we cover here at Cheapstocks.)

Garbage and Golf
Avalon’s primary revenue source is its waste management business, which generated $29 million of the company’s $34 million in revenue for 2005. Waste management has two segments, disposal (American Waste Management Services), and landfill management (American Landfill Management).

The company also manages two 18 hole golf courses, through its Avalon Lakes Golf Inc subsidiary. One of which, a championship course in Warren, Ohio, the company owns. The other, Squaw Creek Country Club, is operated but not owned by Avalon. In 2005, the golf segment generated $5 million in revenue.

The Fundamentals
Revenue for 2005 was $34 million, up 13% from 2004’s $30 million. Net income was $541,000 up from a loss of $845,000 in 2004. In fact, 2005 was the first positive year on the earnings front since 1999. For the first six months of 2006, revenue has been $18 million and net income $500,000. However, a closer look at these numbers shows that operating income is actually negative, and what is aiding the bottom line is the interest income generated from a relatively large amount of cash and short term investments. Buyer beware, it’s typically not a good sign when your operating businesses need an assist from your cash position in order to put you in the black.

The Balance Sheet
Lets cut to the chase. As of 6/30/06, Avalon had $14.2 million in cash and short-term investments, and less than $250,000 in debt. That’s the equivalent of nearly $3.75 in cash per share, while the stock hovers around $7.00. We recognize that cash is meaningless if a company is burning through it rapidly, but that does not appear to be the case at Avalon.

The Burning Question: What’s an Ohio Golf Course Worth?
We are intrigued by the company ownership of a 200 acre golf course. We don’t purport to know what it might be worth, but believe it may be a potentially valuable asset. We also can’t begin to value the waste management businesses. That leaves us with one question. Are Avalon’s non-cash assets the waste management business, and golf course worth more than $12 million (market cap less cash)? We’ll continue to try and find that answer. We don’t currently hold Avalon shares.

NCAV: $12 million
Mkt Cap: $26.3 million
NCAV/Mkt cap: 2.19
Enterprise Value : $12 million
Book Value Per Share: $9.76
Price/Book : 1.41

Recent Price Action
Avalon has been on a bit of a tear lately. We are not sure what is driving this, but it is important to be aware that tiny companies such as this can be very volatile. When we started writing this column, the stock traded below $6.00, and in one day on volume of less than 40,000 shares, rose above $7.00 intraday. This type of price action could occur on the downside as well. Also, low liquidity stocks such as Avalon may have wide bid/ask spreads.

Postscript: With current shareholder roles hovering at 534 for Class A shares, and 11 for Class B, this company may be a candidate to shrink sharteholder roles below 300, delist, and avoid SarbOx.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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