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The SmallCap Investor Stock of the Month - May 1997 financialweb.com Consolidated Mercantile Corp. Nasdaq SmallCap: CSLMF *Hidden Treasure Discovered* Consolidated Mercantile Offers Investors Opportunity in Two Companies for a Fraction of Their Value It's not surprising that small public holding companies are often overlooked by Wall Street. After all, most OTC brokers and the mainstream financial press prefer to spotlight "hot story" stocks over fundamental value situations. For inquiring investors, however, a little research can result in the early discovery of exceptionally undervalued situations such as Consolidated Mercantile Corp. (Nasdaq SmallCap: CSLMF). Consolidated Mercantile, which has seen its stock price decline nearly 40% over the past year to about $1.13, is a "hidden treasure" in the small and micro-caps trove. That's because CSLMF is now trading at a significant discount to the current value of its principal subsidiaries, Polyair Inter Pack, Inc. (Toronto: PPK) and Amdesco, Inc. (Nasdaq IPO expected in 1997). The crown jewel of Consolidated's holdings, Polyair Inter Pack, Inc., is a fast growing and profitable manufacturer of packaging products such as bubble wrap, swimming pool accessories (safety covers, liners, etc) and insulation materials. In February 1996, Polyair raised over $12 million in it's IPO on the Toronto Stock Exchange. The proceeds are being used to increase capacity, improve efficiency and expand sales. The Company's strategy involves a five-point plan to improve sales and profitability. First, Polyair plans to increase its market penetration in the U.S. and Canada and to serve all major U.S. Markets by 1999; Second, increase manufacturing capacity by opening new facilities and expanding existing plants; Third, increase sales through the introduction of additional products to its line. A wider range of products will add leverage to its sales force by offering distributors the ability to use fewer suppliers and purchase more products from Polyair. Fourth, improve operating efficiencies through vertical integration. Polyair recently acquired equipment which allows it to manufacture polyethylene foam and film which represent about half of its raw material purchases, cutting product costs and substantially reducing reliance on outside suppliers. This, alone, is expected to have a significant impact on operations as soon as the second quarter of 1997. And, finally, Polyair, plans to grow though strategic acquisitions. Although 1996 was a transition year for Polyair as it incurred costs to develop new markets, products, and facilities, the company still earned a respectable $0.22 per share on a 24% increase in sales. 1997 should bring even stronger results as these efforts continue to pay off. Yet Polyair only trades at a P/E ratio of 15 times 1996 earnings! Add the effects of listing on Nasdaq to 1997 earnings growth and Polyair's stock could receive a major boost. Consolidated owns 2.6 million shares of PPK. At its current price of $3.38 (U.S.), PPK is worth about $1.47 per share of CSLMF. Add the higher p/e's typical of a Nasdaq listed stock and significant EPS growth in 1997 and the value of CSLMF's investment in PPK could be worth $3.12 per share (based on a p/e of 20). Consolidated's other key holding is Amdesco, Inc. Amdesco, through it's majority interests in Lanark Furniture Corp., Distinctive Designs Furniture, Inc. and Kroehler Furniture Group focuses on the manufacture and sale of furniture to major department stores and other furniture retailers in Canada and the United States. Consolidated says that Amdesco's sales and gross profits are beginning to take off due to expansion into U.S. markets and recent improvements in manufacturing efficiencies. However, the true value of Amdesco will likely become known later this year when the Company goes public in an IPO and lists on Nasdaq. Since the IPO is limited, most investors will not be able to buy Amdesco unless they purchase shares in the aftermarket, possibly at much higher prices. Yet, anyone can buy a stake in Amdesco now, by purchasing CSLMF. Once Amdesco trades, the price of its shares should be reflected in the price of Consolidated. A "hot" offering in Amdesco's IPO could add further market interest in CSLMF. Currently, Amdesco adds about $1.25 in value per share of CSLMF. Depending on Amdesco's performance and the success of its IPO, it could be worth much more than that. Consolidated also owns stakes in Allcorp United, Inc., and Genterra Capital Corp., which, along with cash and other assets, minus debt, conservatively adds another $0.50 in value. If you've been keeping track, the current valuations add up to $3.22 per share - more than double the present stock price. Add to this the impact of a Nasdaq listing for PPK, and our value rises to $4.87. A strong IPO and aftermarket for Amdesco could push values even higher. So why is CSLMF so undervalued? The answer may be as simple as to be summed up in one word: obscurity. As of the date of this report, The SmallCap Investor is not aware of any significant analyst coverage of CSLMF other than a recommendation by MicroCap guru, Max Bowser, about a year ago. Bowser's publicity appeared to have resulted in a sudden boost in CSLMF from about 1 3/8 to 2 3/4 last June. But the stock price has steadily eroded since then as coverage of CSLMF languishes. With the new Nasdaq listings and the IPO, there will be more reasons for both media and analyst coverage of CSLMF this year. Meanwhile, Polyair and Amdesco currently offer enough in the way of apparent fundamental value for CSLMF to warrant attention. An investment in shares of Consolidated Mercantile allows investors to participate, at a discount, in at least two growth companies without having to buy shares on The Toronto Stock Exchange or trying to get in on an IPO. Once both companies are listed on Nasdaq, shares of CSLMF should trade in parity with the value of its publicly traded holdings - which could be 2x to 4x its current level in the next 6-12 months. Nasdaq SmallCap Symbol: CSLMF Price on date of report: bid $1.125, ask $1.375 52 Week Range: $1.125 - $2.75 Shares Outstanding: 5,830,597 Float (approximate): 2,900,000 All figures in this report are in US Dollars. Contacts: Stanley Abramowitz of Consolidated Mercantile (416) 920-0500 (Canada) Mark A. Marsella, President, Network Enterprises, Inc. (860) 669-1061 For continuing coverage and moderated discussion of Consolidated Mercantile Corp., please join our free mailing list, SmallCap Investor News. To subscribe, send e-mail to smallcaplist-request@magicnet.net with the word subscribe in the body of the message. Copyright (c) 1997 Axxess, Inc. All rights reserved. This report does not represent an offer to buy or sell securities and is provided for informational purposes only. The information in this report was obtained from sources believed to be reliable, however, Axxess, Inc. cannot guarantee its accuracy. This report is not intended to be a complete description of Consolidated Mercantile Corp. Readers are advised to consult with their own independent tax, business and financial advisors with respect to any investment, including any contemplated investment in the company featured in this report. All information contained in this report should be independently verified with the featured company and by an independent financial analyst. You should independently investigate and fully understand all risks before investing. Employees of Axxess, Inc. may, from time to time, buy or sell securities mentioned in The SmallCap Investor. | ||||||||||||
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