cyan AG (XETRA)

Why should you care about Cyan?  They continue to prove their market leading digital security offering by booking new contracts, the most noteworthy a global group agreement with Orange.  This adds a higher level of certainty to financial results over the next 2-3 years (pending successful rollout).  Despite this, the company is trading at ~6.0-7.0x EBITDA vs. peers in the low to high teens.  The stock has suffered from a 2019 EBITDA cut (increased investment spend but increased 2021 EBITDA guidance as a result) and the fact it trades on a lower German exchange (plan to uplist to Frankfurt in 2020).  It was announced on 11/13/19 that the company has retained Lazard for a strategic review, “To fully capitalize on such growth opportunities, the management board of cyan AG has decided to evaluate potential options regarding its US Expansion Strategy.” 

Cyan is a digital security company that offers white-label solutions to mostly mobile network operators, but also other financial companies and governments.  The slide below from their Investor Presentation best summarizes what offerings they bring to the market. 

I’m not an expert on the technology by any means.  Cyan will tell you their key differentiation vs. peers is the ability to offer both On-Net and Endpoint services at scale.  Looking at the contract wins over the past year+, I tend to believe them.

The company has successfully implemented their programs for T Mobile in Austria* and Poland and have announced the following:

  • 11/2018 Aon strategic partnership on digital security
  • 12/2018 Orange global group 6 year contract
  • 7/2019 T-Mobile Austria contract extended, ahead of schedule, by 1.5 years until mid 2022. Added integration of fixed network customers into the customer spectrum
  • 7/2019 Telecom Argentina proof of concept installation
  • 7/2019 Wirecard strategic partnership
  • 11/2019 Flash Mobile sale of 60mm new licenses across LatAm

The Orange contract is the biggie. Across the entire system Cyan will be in 28 countries, exposed to 260mm fixed and residential customers, across residential and business accounts. Implementation has been ongoing throughout 2019 with rollout in France in Q4 2019 with the rest of Europe and Africa to follow in Q1 2020.

Based on the estimated implementation rate of this contract, Cyan issued 2021 guidance of Revenue of at least €60mm. This has since increased to Revenue of at least €75mm and an EBITDA margin target of 50% after the company increased investment spending to capture the additional new business opportunities available. They included the following slide in their Q319 results.

I think the 2021 guidance is conservative. The biggest driver right now will be the successful implementation of the Orange contract. Cyan assumptions here are a 6.4% adoption rate with an average ARPU of €1.56/year. This will vary between €1 to €4 depending on the different areas as Europe will be a lot different than Africa. The T-Mobile Austria and Poland adoption reached 25% in the first 3 years, here the ARPU was between €1.50 to €2. Based on the varying geographies in the Orange deal there will likely be different sales strategies such as opt-in, opt-out, and mandatory plans. As Orange shares in the revenue, they have an incentive to lean towards stickier strategies such as opt-out and mandatory plans that would vastly increase the 6.4% adoption estimate.

Even if we don’t assume any upside to adoption, Cyan currently is trading at <6.5x 2021 EBITDA. Give a low-end peer group multiple of 12x EBITDA, shares would trade at nearly €40 vs. ~€20/share today. That doesn’t include any additional contract wins or the value this asset could have to a strategic with the ability to penetrate the U.S. market. The strategic review outcome is a win-win in my mind: either/or the company lists in the U.S. bringing much deserved attention to the name, or the company sells itself at what I think would be a value at least 2x current prices.

*Worth noting Cyan did a 10% capital raise in July to support the increased level of growth spending and it was done at €28/share. The major shareholders all participated and even agreed to a 12-month lock-up. Management holds ~8% of shares outstanding and ~38% is split between 3 Austrian entrepreneurs.


Microwave Filter Company (MFCO): Trading at 25% of Liquidation Value

The company’s name is pretty self explanatory, MFCO manufactures radio frequency (RF) filters and related components for eliminating interference and facilitating signal processing for the following markets: Cable Television, Broadcast, Commercial and Military Communications, Avionics, Radar, Navigation and Defense.  The 10-K offers as much information as you would expect from a ~$1.2mm market cap company that is attempting to go dark (more on that later).  The radio frequency market, from what I can tell, is very competitive.  It seems like there are a number of Mom and Pop type manufacturers and one large competitor of note is owned by Dover Corporation (DOV).  Long story short, the company doesn’t benefit from a huge moat, but from what I can tell they have built up a solid reputation of being able to deliver custom applications to customers quickly.  When you search for the term ‘Competition’ in the 10-K, the following is the only result,

The principal competitive factors facing both MFC are price, technical performance, service and the ability to produce in quantity to specific delivery schedules. Based on these factors, the Company believes it competes favorably in its markets.”

To be able to produce in such quantity and customization you would need a state of the art facility one would think?  Talk about burying the lead, now we are to the whole point of the article.  The company owns its 40,000 square foot office and manufacturing facility in East Syracuse, NY and the 3.7 acre lot it sits on.  Based on precedent transactions in East Syracuse it seems $75-100/sqft is close to fair value.  That’s at least $3mm for the value of the building compared to $1.2mm market cap.  Let’s jump into quick approximation of what liquidation value would be. 

Liquidation Value Estimate (values as of 6/30/19)

Net Working Capital: $1,097,856

  • Given the company’s backlog of ~$740k, I didn’t make any adjustment to inventory.

Long Term Liability: $(179,178)

  • This is actually a mortgage against the property with KeyBank.  From what I could gather I think proceeds were used for working capital and to shore up the balance sheet after a special dividend in 2012/2013.  Original principal was $500,000, taken out in July 2013 with a 10-year term.

PP&E: $4,925,341

  • $3,500,000 for the value of the 40,000 square feet of manufacturing and office space.  This assumes a price of $87.50/sqft, approximately what a light industrial building sold for in September of 2019. 
  • $259,200 of Land. MFCO is not utilizing all of the 3.7 acres, only about 1 acre at the stated square footage.  I’m assigning what I think is a very conservative estimate of $96,000/acre.  Why $96k? There was a half acre lot that sold for double that amount per acre in June in East Syracuse. 
  • $1,166,141 for Machinery & Equipment.  The estimate is 1/3 of what is listed in the 10-K, again to be conservative.  As stated above, the facility needs to be state of the art to compete and deliver in the quantity and speed necessary for customers.  From the December 2018 10-K:

Efficient computer simulation, design and analysis software enhanced by proprietary MFC developed software, allow rapid and accurate filter development at reasonable cost…Other in-house testing facilities include environmental chambers capable of testing products for temperatures of -40 to 200 degrees Celsius and humidity up to 100 percent. Several high power amplifiers are available for power tests. We have 2500 watt capability from 88-108Mhz with 200 watt capability up to 2200 Mhz. Facilities are also available for salt spray, sand and dust, shock and vibration, RFI leakage and altitude testing.”

  • Total Liquidation Value Estimate = $5,844,019
  • Shares outstanding (as of 8/1/19) = 2,579,238
  • Liquidation Value per Share = $2.26
  • Closing price as of 11/18/19 = $0.51
  • Potential return = 443%

I know I know, there are many reasons to shoot this down.  I will try to answer some of them below and you can ask any I miss in the comments.

Isn’t the business just a melting ice cube?

Not exactly.  While the business is volatile, they jump back and forth between positive EBITDA and should do between $0.2-0.3mm of EBITDA in Fiscal 2019 which ended 9/30/19.  The biggest risk I see is their reliance on a couple large customers.  Two customers usually take up 30-50% of total revenue.  This explains the volatility as different capital spending programs are undertaken.  The business, while not great, could be a lot worse.

So the company is going dark?

Well trying to, in May they filed an 8-K with the following:

On May 2, 2019, the Board of Directors of Microwave Filter Company, Inc. (“MFCO” or the “Company”) unanimously approved the filing of Form 15 which is a voluntary filing with the Securities and Exchange Commission, also known as the Certification and Notice of Termination of Registration.

The Company’s Board of Directors considered the costs associated with the preparation and filing of reports, management time spent on the documents and the costs of outside legal and accounting resources.  The Company will continue to put their financial statements on its
website (www.microwavefilter.com).”

15 days later they filed a 15-12G showing they have 459 holders of record, quite a ways from the less than 299 needed to go dark.  The company has been buying back shares over the last few years, a couple hundred of dollars at a time, so my guess is they have been trying to work this down.  I don’t see going dark as a negative really, as long as they are still making financials available to us.  The part that would worry me about them going dark is the next piece.

Insiders Own Very Little

Now this isn’t always bad but combined with going Dark, it’s harder to feel like management has your back if they don’t have a material investment in the company.  The 10 person Director and Executive Officer group as a whole own 6.9% of the company.  Normally that would be an average amount but given the market cap is $1.2mm, 6.9% is very little compared to any members net worth, I’m guessing at least. 

Other Investors Involved

Zeff Capital had offered to purchase the company in January of 2018 for $0.72/share.  At the time he had owned 8.6% of outstanding shares.  In the original letter he references the company’s willingness to go Dark.  Zeff withdrew the offer in June of 2018.  He also sold down his stake below 5% recently in 2019 so he no longer has to disclose his holdings.


I think I’ve laid out how unique of a situation this is at MFCO with the company currently trading for less than 25% of my estimate of liquidation value.  At the very least the stock should reflect the value of the office building they own and the net working capital which would give us a even more conservative liquidation value of $1.71/share, 335% greater than the close on 11/18/19. 


TableTrac (TBTC): Impressive growth story with a long runway ahead

At a market cap <$15mm, TableTrac (TBTC) is small enough to fall off the radar of most investors but definitely deserves a look for those of us that traffic in the under the radar world.  I originally came across this name in Avram Fisher’s 3Q18 letter to investors (http://www.longcastadvisers.com/letters).  As an aside, I would definitely recommending Fisher’s letters to anyone interested in small and microcap companies, it’s always one I look forward to every quarter. 

TBTC’s business model is simple enough.  Their main product, Casino Trac, helps casinos track and manage table games, loyalty programs, as well as cash management and accounting/audit.  The company initially sells the hardware and then also collects service and maintenance revenue once the system is installed.  The split between Hardware and Service revenue is roughly 65%/35%, respectively.  Despite its size, TBTC has been able to carve out a nice little niche catering to smaller casino operators in 14 states (MD, TX, OK, CO, NE, IA, MN, WI, ND, SD, MT, WA, NV, CA), Central and South America, the Caribbean, Australia, and Japan. 

Why do I like the stock?

  • Growth Potential: TBTC has admirably executed on its growth plan thus far.  Results tend to not increase in a straight line given the lumpiness of contract wins but the last three years have seen revenues grow at a 10% CAGR due to a significant pickup in installation momentum as the company has successfully expanded its footprint in the U.S. and with suppliers in Australia and Japan.  2011-2014 averaged about 8 installations per year with 2015-2018 registering an average of 14 per year.  In the first half of 2019, the company installed 5 systems and has another 4 in backlog.  I don’t expect this momentum to stop either.  The company is only in 14 states and has proven they can enter foreign markets through distribution agreements most notably in Australia and Japan.  Their exclusive Australian supplier installed another 11 systems in 1H2019 and in early July, TBTC announced an exclusive distribution agreement with a Japanese company, with $1.2mm of contract deliverables expected to be recognized in Q3 2019.
  • Valuation:  On the surface at an EV/EBIT of ~20x, the average passerby probably isn’t going to think TBTC is a steal of deal.  However, I think this would be ignoring the company’s growth prospects and the fact that the current level of SG&A spend is artificially high as the company is focused on growing installations (operating Income has still grown at a 50% CAGR over the last 3 years despite high levels of growth spending).  Over time I’d also expect gross margins to improve from the already impressive high-60% area as service and maintenance revenue continues to increase as a percentage of total revenue.  The supplier agreements in Australia and Japan will also continue to deliver higher margin revenues and I would expect this to be replicated in more markets.  (I’m planning on attending the Annual Meeting at the end of the month and this is something I’m going to ask more about.) 
  • Aligned Incentives:  Founder/CEO Chad Hoehne owns ~26% of the company.  Hoehne had stepped down as CEO in 2011, maintaining a board seat and President role, but retook the CEO role in 2017.  I have no idea the circumstances surrounding these role changes, but I would imagine it wasn’t his plan to retake the day-to-day operations. As with any owner/operator, one of the most likely exits is through a sale and I think TBTC has definitely proven they own their niche of the market, and could prove valuable to a larger strategic competitor.

I don’t own shares because I think the company might be purchased at a premium any time soon.  I own shares because I think you get a high quality business, with an impressive growth runway that is not reflected in today’s valuation. Please comment with any comments, criticism, corrections, etc.

Thank you for reading.

Coming back to HEAR, bought some more today

To avoid burying the lede (I feel if anything I can get to be too verbose sometimes), I bought some more shares of Turtle Beach today and wanted to highlight it for the simple fact that I think it is super cheap, I’m not vain enough to think anyone is, or should, be looking at my for Buy signals.

I wrote about Turtle Beach (HEAR) last November and since then the stock has dropped from $15 to $9. But the story is far from what these two numbers would lead you to believe.

From my article in November, “Currently the market is valuing HEAR as if sales will completely revert back to pre-battle royale levels. This is just not going to happen. While we are not going to see an 80% top-line growth number in 2019, and may even see a modest decline, HEAR is positioned with a clean balance sheet to drive profitable growth beyond 2020. Management has identified adjacent growth initiatives and now has the balance sheet to pursue these…After a normalization year in 2019, with revenue off slightly from 2018, I would expect HEAR to deliver continued growth as it continues to dominate the console headset market while building market share in the PC headset market. The PC market increases HEAR’s addressable market by about 50% and the company will begin targeting a 10-20% market share in the next couple years…FCF and EBITDA could both fall 50% and HEAR would be trading around a 10% FCF yield and less than 10.0x EV/EBITDA.”

EBITDA is expected to fall by about 50% in 2019 but at $29mm, the company is trading only at a 4.7x multiple (EV assumes that HEAR used the revolver to finance the $15.6mm purchase of Roccat). I expect FCF to be ~$22mm this year, giving us a very attractive FCF yield.

Mentioned above, the company purchased ROCCAT to gain a greater entry into the PC gaming market and it also opens up more doors to Europe and Asia.

I still remain confident in Turtle Beach’s ability to dominate the console headset market. The acquisition of ROCCAT provides a platform to address the PC market which is just as large as the console market (company is targeting getting ROCCAT sales from $30mm currently to $100mm). Looking at Logitech, they trade at about a 17x EBITDA multiple. I’m not calling for that type of premium valuation on HEAR as I see the differences in the respective businesses, but a <5.0x multiple is way too cheap to me. That’s why I bought more today and will likely buy more in the near future as long as this basement price persists. I’m hoping the company has been executing on its $15mm buyback program at these sub-$9 prices!

Pico Holdings (PICO) – Collection of Scarce Assets Worth 2x Current Market Price

I think there’s a reasonable argument to make that PICO Holdings (PICO) is conservatively worth 100% more than its price in the market today. The company has simplified its operations to focus solely on its portfolio of water rights located in Nevada and Arizona. I’ll describe the value driver of the rights in each state soon, but overall the water rights are a scarce asset that have and will only increase in value due to drought conditions as well as above average population growth.

PICO is focused on monetizing the water assets and using the proceeds to return capital to shareholders. This process has already begun as the company has simplified. In 2017 PICO sold their last non-water related asset, a stake in homebuilder UCP, for $115mm using the proceeds to pay a special dividend to shareholders. After a successful ramp of activity in the sale of water credits in 2017 and 2018, PICO repurchased 10.6% of outstanding shares in 2018. In 1Q19 the company repurchased $4.2mm of shares.

The sales in 2017/18 and other disclosures give us a good idea of where the market is currently valuing these assets. As I stated above, my conservative estimate is that the total value of the company today is 100% higher than today’s value. I’ll break down my view of the value of these assets below.


In Nevada, the value driver of water rights is the above average population and employment growth, which have combined to create a housing shortage.

Screen Shot 2019-05-01 at 10.40.56 PM.png

Screen Shot 2019-05-01 at 10.41.14 PM.png

Screen Shot 2019-05-01 at 10.41.51 PM.pngScreen Shot 2019-05-01 at 10.42.08 PM.png

Each house needs about 0.5 Acre-Feet of water and as developers bring new houses onto the market, they must secure water rights that can be pledged to the area’s water utility for service. PICO has two main groups of assets in Nevada: Fish Springs Ranch and Carson/Lyon.

Fish Springs Ranch (FSR):

PICO owns a 51% stake in FSR, located 40 miles north of Reno. The water rights total 12,907 Acre-Feet (AF). Of this, 7,907 AF is available to be sold. The other 5,000 AF has received the necessary approvals from the the Nevada State Engineer, but federal rights of way would need to be updated before they could be monetized.

So what is this worth?

  • In 2018 PICO sold 77 AF to a developer for $2.7mm or $35,000/AF.
  • In 1Q19 86 AF were sold to a developer for $35,000/AF.

As the majority owner and managing partner of FSR, PICO has funded all of the operational and development costs. These costs accumulate as Preferred Capital, which accrues interest at LIBOR + 450bps. As of 12/31/18 the Preferred Capital balance stood at $181.7mm and was growing at >7%. As sales are made, the Preferred Capital will be paid out first. Applying the $35,000/AF value to the 7,907 AF available for sale, while paying out 100% of Preferred Capital first, you get the following value of the FSR assets:

Screen Shot 2019-05-01 at 6.08.30 PM.png

I think this is a conservative estimate since it doesn’t include the additional 5,000 AF the company owns. I’m confident these additional 5,000 AF hold value, but given the uncertainty around development timing I’ll omit them for now.


A little more straightforward here, the company owns 3,500 AF along the Dayton corridor, east of Carson City and Lake Tahoe. In 2018 PICO sold 511 AF for $10.3mm or $25,000/AF.

3,500 AF @ $25,000/AF = $87.5mm in value.

Kane Springs:

PICO has an option agreement with a developer to sell the remaining 500 AF of water rights in this area at $6,358/AF, escalated at 7.5%/year from September 2017. The agreement expires in September 2019 with a cost to exercise of approximately $3.5 million. To date, the developer has made all required annual option payments ($60k/year).

Kane Springs Value = $3.5mm


The value driver of the Arizona assets is a little different than Nevada. What PICO owns in Arizona is Long Term Storage Credits (LTSC). They are similar to the Nevada water rights as they are Acre-Feet of water that can be purchased by municipal or industrial users to satisfy water requirements. The driver here is the strain on the entire water supply due to the ongoing drought in the area and the effect it has on the Colorado River Basin and Lake Mead, where Arizona derives about 40% of its water.

If Lake Mead is expected to drop below 1,075ft, a Tier 1 shortage is declared. At Tier 1 (<1,075ft) Arizona would see their annual allocation from Lake Mead drop 320,000 AF. A Tier 3 shortage would push this to 480,000 AF annually. The states that share the reservoir (Arizona, California, Nevada, and Mexico) are doing everything they can to ensure shortages like this are avoided. On and off over the last 8 years they have been working towards something called the Lower Basin Drought Contingency Plan (DCP). The DCP would require additional water be held behind Hoover Dam in Lake Mead requiring a reduction in the volume of water that Arizona, Nevada, and California could use each year. So far, nothing has been agreed to. In a worst case scenario the Secretary of the Interior could use his/her power to determine what the shortage would be for each state.

In conjunction with the DCP group meetings, the Bureau of Reclamation presented its view on the likelihood of shortages. Without a DCP agreement, they see a 50% chance of a Tier 1 shortage in 2020 and between a 60-65% chance of a Tier 1 shortage in 2021-2026.

PICO’s assets in Arizona are perfectly positioned to benefit from either outcome here. Either the states take voluntary cuts under the DCP or they risk being subject to cuts when shortages are declared based on Lake Mead’s elevation (you can see the elevation levels of Lake Mead here http://mead.uslakes.info/level.asp). In either situation Arizona will need to replace hundreds of thousands of Acre Feet of water.

How much are the Arizona assets worth? There were three sales of LTSCs in 2017.

  • In February 2017 PICO sold 100,000 LTSCs total to two parties (AZ Water Bank Authority and Central AZ Groundwater Replenishment District) for $25mm ($250/LTSC).
  • In December 2017 PICO reached an agreement to sell up to 15,000 LTSCs to the Roosevelt Water Conservation District(RWCD) for a base price of $350/LTSC. The LTSCs may be purchased by RWCD at any time over the term of the agreement, which expires on December 31, 2019. Any purchases prior to December 31, 2017 will be at the base price of $350 per LTSC and any purchases of LTSCs under this agreement beginning January 1, 2018 will be at a price that is increased from the base price at 10% per annum.
  • The company also currently has 1,150 LTSC under contract with Apache Sun Golf: 1,150 LTSC at prices ranging from $306.26-$375.18/LTSC, terminates 9/30/21

Given the escalator in the agreement from 12/31/17, the current market value would be $423.50/LTSC if RWCD exercises this agreement. I used a few possible prices and you can see the corresponding value break down below.

Screen Shot 2019-05-01 at 9.47.50 PM.png


As stated in the opener, I think there’s a reasonable argument that PICO is at least 50% undervalued by the market.

Fish Springs Ranch $229.2mm

Carson/Lyon $87.5mm

Kane Springs $3.5mm

Arizona Base Case $116.3mm

Cash $12.6mm

Total Value $449.1mm

I intentionally was conservative in the estimation of value: not ascribing any value to some assets that are further from monetization and smaller in nature (including the Dodge Flat asset sale that closed in 1Q19 for $8.9mm of total proceeds). There is an argument to make that the supply/demand imbalance will push prices above levels that have been recorded in previous transactions. From what I’ve read, PICO’s water rights and constructed pipeline are the only source of water for developers in the Northern Nevada area.

While timing is uncertain I think the data points towards a short term need for water credits in both Nevada and Arizona. Monetization won’t be in a predictable straight line over the next 3-5 years. As part of the simplification of the business, PICO cut overhead costs in half, now expecting them to be $5.5mm going forward. This will free up more cash to be returned to shareholders as water rights sales are realized as well as help ease the lumpiness of any sales.

Overall, I think PICO offers investors a unique collection of assets that have a definite scarcity value and a nice margin of safety built in at current market prices.

I currently own shares of Pico Holdings (PICO). This article is not a recommendation to buy or sell.

Enservco Corporation (ENSV) – Still dealing with a New Year’s Eve hangover

I came across ENSV this week and it checked enough boxes to pique my interest.

ENSV is an oilfield services company providing frac water heating, hot oiling and acidizing, and water transfer services across many of the major domestic oil and gas  basins in the U.S (DJ/Niobrara, Bakken, Marcellus and Utica Shale, the Jonah Field, Green River and Powder River Basins, the Eagle Ford Shale, and the Stack and Scoop).  The business is inherently cyclical with many of the services needed in colder weather periods, making the 1st and 4th Quarter about 70% of annual activity.

Like anything oil related, it fell throughout 4Q 2018.

Screen Shot 2019-04-28 at 7.55.38 PM However, as the title suggests, the company hasn’t recovered at all YTD.

Screen Shot 2019-04-28 at 7.57.04 PM.png

The company survived the depths of the last cycle without too many bruises, and came out on the other side with a much improved fleet in terms of size and service offerings like Water Transfer (revenue grew ~100% to $4.2mm in ’18) to differentiate vs. customers.  

Screen Shot 2019-04-28 at 8.08.30 PM.png

2018 results were good.  Revenue grew 26.5% to $46.9mm while EBITDA grew 29% to $4.9mm. (For comparison’s sake, ENSV’s peaks reached during the last cycle occurred in 2014 with Revenue of $56.6mm and EBITDA of $11.5mm.)

Results look even better than ‘good’  given the cyclicality: the 4Q18 meltdown in oil prices paused many oil companies’ spending until 2019 and As a result 4Q Revenue only grew 13% while EBITDA fell 11%.

The company pre-reported some 1Q 2019 numbers on 4/25/19: Revenue of $26.2mm, +29% YoY, with EBITDA and Net Income expected to grow YoY also.

The company’s balance sheet is one aspect that does give me some pause, at first glance, with Total Debt of $38mm.  However, when you account for the fact that the CEO, CFO, and COO all have long-term options as part of their incentive comp that only vest if/when Debt/EBITDA reaches 1.5x, I expect debt reduction to be a focus throughout 2019 and beyond.

The largest shareholder is a small and micro cap hedge fund, Cross River Partners, that owns 23% of the company and has a seat on the board.


ENSV checks a lot of boxes of being an interesting opportunity.  Management has the proper incentives in place: skin in the game and LT options vesting on Debt/EBITDA 1.5x/share price reaching $2.25.  While the business is competitive, ENSV’s scale in this niche will be able to beat smaller regional operators.  I also wouldn’t be surprised to see more tuck-in acquisitions throughout 2019.  The price is where I pause for now, in a world where oil remains > $50/bbl consistently I think ENSV’s EBITDA could get back to the peaks seen in 2014 and surpass it.  With a current EV ~$60mm, at $11mm EBITDA, EV/EBITDA is already in the range of its peers, 5-7x EV/EBITDA.

I would need to see some more information around the utilization trends of the company’s rigs.  While I recognize the increase in fleet size, at what point do we see that paying off?  Revenue is getting close to 2014 peaks but EBITDA isn’t despite this increase.  I’ll also be interested in commentary around the Alder acquisition on the Q1 19 call.  ENSV issued an 8-K in April that disclosed the purchase price was dropping by $2mm.  Has the performance lagged? Were there items not disclosed prior to purchase?  I’ll be staying on the sidelines for now, but this is one I will be watching closely going forward.


Tandy Leather Factory: Adding More Gas to this FCF Machine

New CEO Janet Carr got a proper chance to address investors on the 4Q18 earnings call on March 7th.  A key theme throughout the call is that FCF, instead of top line growth, will be a priority driving decisions going forward.  Consistent with this focus, the retail stores will be operated to maximize cash flow, likely leading to 4-6 store closures in 2019 in addition to the 3 closures announced in February.  No store openings are planned so Capex will likely be at a lower level than we have seen in recent years ($1mm ’18, ~$1.7mm in both ’17 and ’16).  Tighter Inventory management continues to be a priority. Even after falling $3.5mm throughout 2018, we are still looking at ~$34mm of Inventory.  It was loosely mentioned on the call that 3.0x Inventory Turnover is an aspiration, given 2018 sales that would imply a further $7mm improvement in Inventory.

Outside of the FCF focus, TLF is also re-focusing on Commercial Wholesale customers.  This is really a no-brainer, and will be a good growth component in a time when the retail segment is being right sized.  Tandy’s main benefit is how large they are in their niche of leather crafting.  Given this, they have the ability to compete most effectively in what is a more commoditized segment of the business.

The focus on FCF should be music to investors’ ears.  FCF yield was >10% in 2018, a year full of one-off expenses.  Now we look to 2019 and despite it being a reset year, I expect the focus on FCF to drive a year over year improvement.  The company continues to buy back shares: 243,387 in 2018 for $1.6mm.  Subsequent to year end, the company fully repaid the $9mm outstanding on the revolver while also having repurchased 53,626 additional shares for $300k.  853,780 shares remain on the current buyback authorization that expires in August.  At today’s (3/18/19) closing price, to complete the authorization would cost $5.5mm for a company that has ~$15mm on the balance sheet and no debt.

I had initiated a small position in February and will be adding to it in the coming weeks.  I really am encouraged by management’s focus on cash flow over top-line growth and as I stated above the focus on the Wholesale business is a no-brainer.  TLF remains a Cash Flow machine, and sooner than later the rest of the market will take notice.


I own shares of Tandy Leather Factory (TLF).  This article is opinion only and not a recommendation to buy or sell.  



Tandy Leather Factory (TLF): A 2018 Buffet business at a 1960s Buffet price


Tandy Leather Factory is a niche brick and mortar retai…..wait guys! Stop! Why are you running away so fast!

Tandy is the dominant market leader selling leather and leather crafting items to retail and wholesale customers in North America (115 stores) and Internationally (1 location in both UK and Spain). In some ways 2018 was rocky: 1) CEO and President (both with long tenures at TLF) abruptly resigned in October. 2) This caused 2020 financial targets to be withdrawn ($87-90mm annual sales and >10% operating profit margin) to be withdrawn. 3) In the past week TLF pre-released 4Q 2018 sales numbers which included notes on 2 U.S. store closures, the closure of the 1 Australian location, and that 2018 operating profit would negatively affected by these and other one-time events. But 2018 wasn’t all bad: 1) The company will end up recording its first positive annual sales growth (+0.9%) since 2015. 2) With the announcement last week, TLF also disclosed their cash balance as of 12/31/18 was $24.1mm, +$5.8mm YoY.

Currently the market is punishing TLF for the negatives of 2018 while ignoring the company’s strong competitive position and arguably very wide moat. Before we dive more into how cheap TLF currently is, take a look at the following link. This report was very informative and helped me get a better idea of TLF’s world and how they have come to dominate it. I feel no shame in linking to another great piece of work as I feel it would be a waste of time to reinvent the wheel. The report was completed in 2015 so some of the ways the company classifies its segments and store count have changed but the main points remain the same:

  • The company sees potential for 150 stores in North America (115 today)
  • Absent new stores, focus on relocating to larger stores in nicer areas
  • Have identified 20 countries outside of NA that could support a TLF store
  • Growth in the U.S. has been constrained by the difficulty in finding and retaining key talent (store managers mostly) as its a tough argument to get someone to uproot their life for a $36,000 salary (raised 40% in Dec. 2016) and 25% of store EBIT as compensation
  • About 40% of sales are leather and 60% leather crafting accessories; the leather sales are commodity-like and lower margin

After reading more on TLF’s competitive position I think it should be easy to see that this in not a cigar butt by any means. The market is offering us a high-quality business, with a sustainable moat, for not too much more than liquidation value. As of 9/30/18, Net Current Asset Value was $44.3mm vs. a market cap of $52.6mm (2/1/19). And despite the noise in 2018, TLF will still likely report ~$5.5mm of FCF for the year.

Despite the removal of the 2020 financial targets I think it is safe to assume a 10% operating margin is a level the company will continue to strive towards. At current EBIT levels, TLF is valued at less than 6.5x EV/EBIT. If you assume they can get to 10% EBIT margin, this drops a full turn, assuming no top line growth.

Concerning the excess cash that’s building on the balance sheet, TLF has an outstanding share repurchase authorization of ~1mm shares, about 11% of outstanding. The company has $8mm of debt outstanding on a $15mm line of credit that is expressly for the use of share buybacks. (It will be converted to a 4-year term loan once the authorization is completed). The buyback has already been extended by one-year as the illiquidity of TLF stock makes it tough to complete buybacks.

The abrupt departure of the former CEO and President is a definite negative, but it doesn’t do too much to shake my confidence in the company or how shareholders will be treated going forward. A main reason for this confidence can be attributed to Chairman, and 30% owner, investor Jeff Gramm. Gramm joined the board in 2014 and has been an advocate for creating shareholder value; he even wrote a book on the history of shareholder activism all the way back to Ben Graham titled, Dear Chairman. Gramm’s involvement leads to me believe that the path forward will include narrowing the gap between intrinsic value and market value while also growing intrinsic value over time.

In summary we have the following:

  • High quality business with a large moat trading for around 6.5x EBIT
  • Current market price near Net Current Asset Value
  • A share repurchase authorization to repurchase 11% of outstanding shares
  • A major shareholder and chairman who is strong advocate for shareholders and narrowing the gap between intrinsic value and market value

Whether it’s the executive departures or just the fact this is an illiquid micro cap in a very niche end market, I think the market is completely undervaluing TLF today. It may not happen in 2019, but I am confident that the 4 bullet points above will combine to create value for shareholders going forward.

I own shares of Tandy Leather Factory (TLF).  This article is not a recommendation to buy or sell.

Parks! America (PRKA) Gets A Letter In Its Christmas Stocking

On Friday PRKA released their FY18 earnings, which were a very welcome positive after the first 3 quarters disappointed on what management described as “higher precipitation levels, as well as unplanned park closures due to several significant weather events”.  I tweeted this on Friday:  

I debated writing a post on PRKA on Friday, but I figured there were enough good blogs covering the background and story so no point to recreate the wheel.  Check them out here: hiddenvalueblog  and otc adventures.

I had accumulated a small position in late summer as I thought this could be an interesting situation given the strong operating track record, cash generation (>10% FCF yield), and the debt refinancing/partial repayment that was disclosed in the 3Q18 10-Q.  I was waiting for an indication that the first 3 quarters of 2018 were indeed a weather related event before increasing the position size.  

Enter Marlton LLC, who has accumulated a 5% stake and released a letter to the PRKA board after market close on 12/17.  Marlton PRKA Letter

The letter raises some valid points around capital allocation and succession issues.  I have two takeaways:

1) This comes from information in one of the blogs listed above. ‘An interesting quirk in the capital structure is the large number of “zombie shareholders.” The company came to market via a reverse IPO, where a former mining company was turned into a shell corporation which subsequently acquired the assets of the Georgia site. This has resulted in 3,000 shareholders in PRKA, which cannot be located. I believe this has been a key impediment to capital allocation policies as the management team does not want to “pay dividends to nobody.”’  This can be easily(?) fixed through a reverse split, to ensure all cash is going into interested shareholders pockets.   

2) I don’t think this should be seen as an indictment on current management.  Not only have they proven themselves excellent operators but they also don’t draw outrageous salaries and are properly aligned with shareholders; insiders hold ~52% of outstanding shares.  Both a more transparent capital allocation policy and clarity around CEO succesion will favor all shareholders (including management) while ensuring smooth operations for PRKA going forward.    

What’s Next?

The fact that the company is incorporated in Nevada (favors incumbent management) and that insiders own 52% makes it tough to believe this goes to a proxy battle.  At the end of the day, the demands/suggestions aren’t outrageous at all.  The dividend/tender offer proposed would leave PRKA still with $0 net debt while the company generates >$1mm of FCF annually.  PRKA has been searching for another deal since 2008 the rights right deal and/or price hasn’t appeared.  If you need a reminder of the execution risk ANY deal will bring just check out the performance of the Missouri park compared to the Georgia park. 


As my tweet inferred last Friday, I thought PRKA’s valuation looked attractive.  Fast forward to Monday, December 17th and we have a possible catalyst.  If nothing else, more eyeballs will be on the company and stock, making it more likely the gap between market valuation and intrinsic value is narrowed.  At ~6.0x operating earnings, ~10% FCF yield, and net cash on the balance sheet equal to almost 10% of market cap, I really like how 2019 is setting up for PRKA.  

I own shares of PRKA.  This is not a recommendation to buy or sell.

Update Following 3Q19 Earnings Call (MMMB)

I don’t think quarterly updates are particularly useful. The thesis remains intact from the previous article, but I figured I’d briefly touch on what I found interesting from the release and earnings call:

1) 2Q Weakness One-Off Blip- If there was any skepticism around managements explanation of a weak 2Q19, this quarter proved it was truly transitory.

2) Operating Leverage- Sales grew at a 12% clip but this drove a 50% growth in EBIT to $536k. Stock is trading close to 10x EBIT going forward, assuming no future growth.

3) Strategic Alternative In 1Q18- Company expects to give update on review underway early in the company’s 1Q2020, which begins 2/1/19.

Investors continue to be in a good position. If the company is purchased as a result of the strategic initiatives, I think it comes at a price about 100% higher than today. If the company remains independent, there is a solid growth runway to a $50-60mm annual sales level.

I hold a position in MMMB. Any article is only opinion and not a recommendation to buy or sell.