Paul,
Here is some more finger food to chew on.
Peruse through Alanco's Balance sheet (dated Sep 30, 1996 just for starters) and you don't find much to rest your hat on. Let's start at the 22 million in total assets or 66 cents/share in 'book value.'
Subtract out "goodwill" of 5.8 million. Subtract out their illiquid mineral rights of 6.8 million. Subtract out 1.6 million for "other assets" (likely leasehold improvements) and intangible assets. So, we're down to current assets and Prop/Plant/Eq for a total of 24 cents per share in relevant book value.
So, it looks like ALAN trades at approx 7 times tangible book value here at $1.75/sh.
Their current ratio is great at 4:1. They have 4 million plus in current assets and only 1 million in current liabilities.
However, shares outstanding grew by 12% from June 30, 1995 (29.9 million shares) to June 30, 1996 (33.5 million shares) and are poised to continue growing by 10% per year. Consequently, we are sailing into the wind as we fight this heavy dilution as time rolls on.
From an operating perspective, its certainly not great to see ALAN burning through cash in their operating business as they were in the past (400k/qtr). I realize their business has improved dramatically in the 2nd Qtr ended Dec, but note a statement by the President & CEO Norman E. Meyer in the 1996 Annual Report dated December 1996 and I quote "Our objective for the Fry Guy program is to produce the cash-flow to maintain the company's operations and take us to profitability while we advance the introduction of the CDSI air pollution control system." In other words, FRY GUY is the cash cow they will MILK to feed their other business and to pay for their bloated overhead (which they are addressing).
As a shareholder, my interest is to own just the FRY GUY division. So let's look at the next 12 months assumptions. Walmart will increase from 1100 units to 1700 by June. Salubre will take 5000 units by Dec 31st, 1997 so at year end the revenue power will be as follows.
Walmart: 12c/order, 80 orders/day (80 orders is the low end of a typical Walmart installation - the figure given to me by Charles Goyette was 80 to 250 orders per day, but I prefer to use the very conservative, low-end for this analysis), 360 days/yr, 1700 locations = 5.8 million in revenue at 80% gross margins or $4.7 million or 13.7 cents per share per year running rate looking forward for one year (stocks always discount the future) as of June 30, 1997 (earlier than Dec 31st).
Salubre: 200 units Jan, 250 units Feb, 500 units each month after that until 10,000 units in the next 3 years. At year end 1997, 4950 units installed. 25c/order, 40 orders/day (let's assume half of Walmart's low-end estimate - this may be high, but not out of the realm of possibility), 360 days/yr, 4950 locations in place by year end = 17.8 million in gross revenue at 80% gross margins or $14.2 million (41 cents/sh)in 12-month forward looking earnings for CY1998.
Let's see now... Let's pretend it is Dec 31, 1997 and all the units are in place... 1700 at Walmart and 4950 at Salubre's locations and now you want to see what the earnings are for CY1998, or the next 12 months...
Walmart: 13.7 cents/sh (rounded)
Salubre: 41.0 cents/sh (rounded)
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Total: 54.7 cents/sh
So, what is a stock worth TODAY (Feb 4th, 1997) when it is highly likely that these guys will earn more than 50 cents year-in and year-out for a long time to come starting just a short 12 months from now? My guess is it's worth at least 10 times earnings power or $5.00 per share. How fast will these guys grow? Will a hike in the cost of chicken, potatoes, veg oil squeeze their margins? Will suppliers continue to deliver at these profitable rates? Can't someone else provide the services that Alanco is? It doesn't seem all that difficult to do what the Fry Guy division has done. Will competition ruin their business? Will people stop eating fried foods (unlikely)?
What about the agreement with China? That only makes these numbers look better.
I guess I didn't factor in all costs, especially their heavy SG&A at 1 million per quarter. Subtract 12 cents from the annual estimate to arrive at (54.7 - 12.0) 42.7 cents/sh. Still, throw a 10 multiple on these earnings and by year end 1997 ALAN should be up above the $4.00 area. Future growth could propel it to a 15 multiple or $6.40.
Lastly, I'll throw in for good measure a quote from "Note 1 - Significant Accountanting Policies. "The Company has incurred operating losses and has had negative cash flows from operations for the last three years. These factors raise SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN." Emphasis is mine.
Any thoughts? I know this makes the issue that much more confusing, but it is NOT A SIMPLE analysis here!
Good luck,
Tim West
12:21 am, Wed Feb 5th |
