Author Topic: ADVC - Advant-e Corp.  (Read 22998 times)

alpha23

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ADVC - Advant-e Corp.
« on: October 18, 2012, 09:03:48 AM »
Summary: Micro-cap EDI provider for small grocery suppliers. Business model not unlike that of EBIX

Ticker: ADVC
Market Cap: $17M
P/E: 9.5
P/CF: 8.6

There are two segments to the business. Edict and Merkur. Merkur is nothing phenomenal. It is a document-routing platform and has much larger competitors that do pretty much exactly what it does but better.

But Edict is interesting. They provide an exchange (an EDI, Electronic Data Interchange - which is mostly responsible for processing payments between the small supplier and the grocery store) for small suppliers to grocery stores (and now the auto industry).

So basically a small, local grocery supplier who doesn't have the infrastructure to have their own enterprise EDI uses Edict. This is great for the grocery store and the small supplier, both of whom get lots of exposure to their desired audience where there is otherwise a complicated and cumbersome series of hurdles to clear in order for them to do business with one another. This creates a network effect, which is friend and enabler of the business moat.

They are now trying to do the same thing in the automobile industry.

I was impressed with the following, which confirms the likelihood of a sustainable competitive advantage in their niche:

- Consistently increasing revenue and earnings for 10 years
- ROE is currently around 32% and has been above 23% for the past 9 years
- ROIC consistently over 30%
- No debt

The founder / CEO owns more than 50% of shares. There is more than $3.5M in excess cash on the balance sheet at present.

Disclosure: I am long ADVC (starter position)

This is the first investment idea I've written up here, I welcome your feedback.

« Last Edit: December 15, 2012, 11:22:39 AM by Parsad »


LC

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Re: ADVC Advant-e Corp.
« Reply #1 on: October 18, 2012, 01:46:19 PM »
The financials look good I'm just not sure I can buy the valuation.

Concerns:
1) It is the software business and the only moat i see is the switching inconvenience for their current customers. That said, their current customers as you say are small suppliers who could go out of business. If they go out of business, will new market entrants use Edict?

2) Exec compensation is about $400,000...does this seem somewhat high? The company made 1.7m in net profits last year.

3) Is the market valuation a bit high? $17.5m market cap...you figure with the $3m excess cash on the B/S that leaves a net $14.5m on the operating assets....would you pay $14.5m for a software company returning about $2m/year? If we assume modest growth you're looking at probably 15-17% return for a software company with a relatively small moat.
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Packer16

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Re: ADVC Advant-e Corp.
« Reply #2 on: October 18, 2012, 03:48:15 PM »
It does appear reasonably priced but the auto industry already has many incumbent EDI providers amongst suppliers.  The same network effect you describe also provides a challenge to enter new markets and obtain new customers.  What has been their growth with their exisiting network and what are the prospects there.  Given the locked-in nature of customers, I think the ability to grow current networks is as or more important the developing new networks.

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ItsAValueTrap

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Re: ADVC Advant-e Corp.
« Reply #3 on: October 18, 2012, 04:51:14 PM »
Very interesting find!

What's the deal with the 10-for-1 stock split?  It seems like perhaps management is trying to make this stock look unappealing or something.  No institutional investor will buy penny stocks like this.
If I wanted to increase liquidity and lower costs I would probably do the reverse (or do nothing).  It would mop up odd lots for one thing.

Quote
Advant-e Corporation Announces Ten-for-One Stock Split, Payment of $2 Million Cash Dividend, and Trading Symbol Change to ADVC

DAYTON, Ohio, October 30, 2009 -- Advant-e Corporation (OTC Bulletin Board: ADVC), a provider of Internet-based Electronic Data Interchange and electronic document management software and services today announced that its Board of Directors has authorized a ten-for-one stock split of the Company’s common stock.  All shareholders of record on November 30, 2009 will receive 10 shares in exchange for each share held on that date. The Company’s Certificate of Incorporation will be amended to increase the number of authorized common shares to 100,000,000 in order to carry out the stock split.

The Board of Directors also declared the payment of $.03 per share (after the ten-for-one stock split) cash dividend, payable in three installments of $.01 each by no later than December 31, 2009, June 30, 2010, and December 31, 2010.  The $.03 per share cash dividend, which will total approximately $2 million, is equivalent to a $.30 dividend per share prior to the ten-for-one stock split.

In addition, the Company requested, and was granted, a change to the Company’s trading symbol from ADVC to ADVC effective on Monday, November 2, 2009.

Jason K. Wadzinski, Chairman, Chief Executive Officer, and President, remarked, “The purpose of the cash dividend is to reward the Company’s shareholders, many of whom have been shareholders for a very long time, and to enable them to likely take advantage of favorable Federal income tax treatment that is scheduled to expire at the end of 2010.  The cash dividend for shareholders who hold the stock long enough to receive all three installments represents a 21% return on investment based on the most recent closing price of the Company’s stock of $1.39.

“The purpose of the ten-for-one stock split is to increase the number of shares available in the public float to provide the potential for additional market liquidity for our stock”, continued Mr. Wadzinski.
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alpha23

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Re: ADVC Advant-e Corp.
« Reply #4 on: October 18, 2012, 06:34:57 PM »
Cheers guys - it is fun to see some responses on this. I have done my best to answer what I interpreted as questions (at least questions that I think I have some sort of an answer for).

1) It is the software business and the only moat i see is the switching inconvenience for their current customers. That said, their current customers as you say are small suppliers who could go out of business. If they go out of business, will new market entrants use Edict?

I suppose this is possible, but it seems unlikely to me. The grocery business has been growing at around 7 or 8% annually even through the recession. New market entrants are very likely to use Edict because they offer the best exposure to the grocery chains. Since there is not a larger competitor, small suppliers would have no reason to go elsewhere (why would you sign up with an EDI company that offered you exposure to less grocery chains), and it will be difficult for competitors to lure them away. Edict charges the grocery chain zero, so the grocery chain would have to have some sweet incentive to do business with someone else...

2) Exec compensation is about $400,000...does this seem somewhat high? The company made 1.7m in net profits last year.

Hmm. Where did you see that? The 2011 10k says that he and the CFO received identical salaries of $201k each. The CEO owns 54% of outstanding shares.
EBIT over the past 12 months was about $2.6M. They also paid out special dividends in 2009, 2010 and 2011.

3) Is the market valuation a bit high? $17.5m market cap...you figure with the $3m excess cash on the B/S that leaves a net $14.5m on the operating assets....would you pay $14.5m for a software company returning about $2m/year? If we assume modest growth you're looking at probably 15-17% return for a software company with a relatively small moat.
Their operating margin is ~27% (EBIT of $2.6M on ~$9.6M of revenue) and has been increasing (albeit lumpily) over the past 10 years. They are growing at a respectable clip.

It does appear reasonably priced but the auto industry already has many incumbent EDI providers amongst suppliers.  The same network effect you describe also provides a challenge to enter new markets and obtain new customers.  What has been their growth with their exisiting network and what are the prospects there.  Given the locked-in nature of customers, I think the ability to grow current networks is as or more important the developing new networks.
Their automotive segment grew 13% in 2011 (18% in Q22012). It is still only about 10% of their EDI business, but they are finding new customers...and they are reporting volume increases in the grocery EDI network (about 5% from Q2 2011 to Q2 2012). Their enterprise segment also grew 20% YOY.

Very interesting find!

What's the deal with the 10-for-1 stock split?  It seems like perhaps management is trying to make this stock look unappealing or something.  No institutional investor will buy penny stocks like this.
If I wanted to increase liquidity and lower costs I would probably do the reverse (or do nothing).  It would mop up odd lots for one thing.

Quote
Advant-e Corporation Announces Ten-for-One Stock Split, Payment of $2 Million Cash Dividend, and Trading Symbol Change to ADVC

DAYTON, Ohio, October 30, 2009 -- Advant-e Corporation (OTC Bulletin Board: ADVC), a provider of Internet-based Electronic Data Interchange and electronic document management software and services today announced that its Board of Directors has authorized a ten-for-one stock split of the Company’s common stock.  All shareholders of record on November 30, 2009 will receive 10 shares in exchange for each share held on that date. The Company’s Certificate of Incorporation will be amended to increase the number of authorized common shares to 100,000,000 in order to carry out the stock split.

The Board of Directors also declared the payment of $.03 per share (after the ten-for-one stock split) cash dividend, payable in three installments of $.01 each by no later than December 31, 2009, June 30, 2010, and December 31, 2010.  The $.03 per share cash dividend, which will total approximately $2 million, is equivalent to a $.30 dividend per share prior to the ten-for-one stock split.

In addition, the Company requested, and was granted, a change to the Company’s trading symbol from ADVC to ADVC effective on Monday, November 2, 2009.

Jason K. Wadzinski, Chairman, Chief Executive Officer, and President, remarked, “The purpose of the cash dividend is to reward the Company’s shareholders, many of whom have been shareholders for a very long time, and to enable them to likely take advantage of favorable Federal income tax treatment that is scheduled to expire at the end of 2010.  The cash dividend for shareholders who hold the stock long enough to receive all three installments represents a 21% return on investment based on the most recent closing price of the Company’s stock of $1.39.

“The purpose of the ten-for-one stock split is to increase the number of shares available in the public float to provide the potential for additional market liquidity for our stock”, continued Mr. Wadzinski.

I don't understand the stock split decision at all. Seems nutty to me.

ItsAValueTrap

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Re: ADVC Advant-e Corp.
« Reply #5 on: October 19, 2012, 02:05:27 AM »
I like the fact that they pay dividends and sometimes buy back shares.  With a lot of microcap (microcrap?) stocks, they won't pay dividends or use buybacks so that the money can go to the CEO and other insiders.

2- How did this company come about?  Is looks like it emerged from the wasteland of the dot-com bubble?  It used to lose money... then hit the critical mass needed to start making money.

Quote
I don't understand the stock split decision at all. Seems nutty to me.
Haha.
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LC

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Re: ADVC Advant-e Corp.
« Reply #6 on: October 19, 2012, 08:39:56 AM »
Just to clear up my response:

I was using net income numbers, not ebit and I lumped the two executives compensation together for a total of $400k.

I like the business I just don't know where the margin of safety is.
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infinitee00

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Re: ADVC Advant-e Corp.
« Reply #7 on: October 19, 2012, 12:48:43 PM »
ADVC is an interesting company. Margins and returns look fantastic and valuation is low in comparison. I have had ADVC on my radar for quite some time after reading the thesis on Value Uncovered. Take a look

http://www.valueuncovered.com/advant-e-advc-ob-value-in-a-micro-cap-tech-stock

However, I have been waiting for the 'right' price ( nothing fancy, just shooting for the lower end of its 52 week low price) which would be $0.2/$0.21- which it never drops to. Volume is very low and some days have 0 shares traded. I bid for some shares when it dropped to $0.22 but my orders never got filled.

Good luck.
 

alpha23

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Re: ADVC Advant-e Corp.
« Reply #8 on: October 19, 2012, 01:56:50 PM »
ADVC is an interesting company. Margins and returns look fantastic and valuation is low in comparison. I have had ADVC on my radar for quite some time after reading the thesis on Value Uncovered. Take a look

http://www.valueuncovered.com/advant-e-advc-ob-value-in-a-micro-cap-tech-stock

However, I have been waiting for the 'right' price ( nothing fancy, just shooting for the lower end of its 52 week low price) which would be $0.2/$0.21- which it never drops to. Volume is very low and some days have 0 shares traded. I bid for some shares when it dropped to $0.22 but my orders never got filled.

Good luck.

Nice. Thanks for sharing the article.

I had a limit order in for .245 for a while and then calculated the difference and weighed the risks and decided to take a starter position now and add as it drops (as it did today, slightly). I figure that the downside risk is minimized by the business moat, no debt and cash cushion, and there is a significant upside possible in the auto and other businesses. The valuation is quite low, especially for margins like Edict has. If they just keep growing at around 4% and keep margins at ~27%, it should be a double in 4 years or so. 

ItsAValueTrap

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Re: ADVC Advant-e Corp.
« Reply #9 on: November 05, 2012, 11:04:44 PM »
WOW

http://www.advant-e.com/press/2012/110512.html

Quote
Advant-e Corporation Announces Corporate Actions in Preparation to Voluntarily Suspend its Obligation to File Reports with the SEC
1-for-10,000 Reverse Stock Split followed by a 1,000-for-1 Forward Stock Split; Up to $2 Million Share Repurchase; and a Potential Special Cash Dividend
DAYTON, Ohio, November 5, 2012 -- Advant-e Corporation (OTCQB: ADVC) today announced that its Board of Directors and a majority of its outstanding shares have authorized a 1-for-10,000 reverse stock split followed by a 1,000-for-1 forward stock split and a $2,000,000 share repurchase program. The Board is also considering payment of a potential special cash dividend pending the results of the stock splits, the share repurchase program and the Company's cash flow. These corporate actions are being undertaken in preparation to voluntarily suspend the Company's obligation to file periodic reports with the Securities and Exchange Commission.

The Board approved these actions and the decision to voluntarily suspend its public reporting obligations due to many factors, including the Company's size and the lack of sufficient liquidity in the market for its common stock, but also the high cost of complying with SEC rules, regulations and procedures and eliminating the requirement to disclose certain competitive business information. The Company intends to file Form 15 with the SEC as soon as practical after the consummation of the reverse stock split, regardless of the outcome of the stock repurchase program, to complete the voluntary suspension of its public reporting obligations.

The Board and a majority of the Company's outstanding shares have approved amendments to the Company's certificate of incorporation in connection with the reverse stock split and the forward stock split. Shareholders who would otherwise hold a fractional share will instead receive a cash payment of $0.27 per share in lieu of a fractional share. The Company estimates the cost of purchasing the fractional shares from its shareholders at approximately $365,000, which represents approximately 1,300,000 pre-reverse stock split shares. The date of the reverse and forward stock splits will be announced at a later date pending regulatory compliance. The Company expects to file a Schedule 14C Information Statement with the SEC further describing the reverse and forward stock splits shortly. The Board of Directors has reserved the right to abandon the proposed reverse and forward stock split at any time prior to their effective date if it believes them to no longer be in the best interest of the Company or its shareholders.

Following the reverse and forward stock splits, there will be an estimated 75 remaining shareholders of record. Although the Company currently has fewer than 500 shareholders of record, the purpose of this action is to provide small shareholders with a liquidity event whereby their shares will be converted to cash at a 4.11% premium based on the average closing price for the 30 trading days prior to this announcement and a 7.9% premium based on the average closing price for the 90 trading days prior to this announcement.

In connection with the share repurchase program, the Company expects to purchase up to $2,000,000 worth of its common stock on the open market while the company is still trading on the OTCQB market or in privately negotiated transactions. The program is designed to give other shareholders the opportunity to sell some or all of their shares.

The Board is also considering the payment of a special cash dividend. The Board anticipates that, if the dividend is declared, it would be paid in December 2012. The dividend is dependent on the outcome of the reverse stock split, the share repurchase program and the Company's cash flow.

Jason K. Wadzinski, Chairman of the Board and Chief Executive Officer, stated, "We became a public company in 2000 to raise capital to help us complete our transition from a software provider to an Internet-based supply chain services provider. We are very grateful to our investors who risked their capital to enable us to execute our business plan."

"Given the lack of liquidity in the market for our shares and the absence of a need for us to raise capital in the foreseeable future, the Board of Directors has determined that maintaining our public presence is not in the best interest of the Company and our shareholders," continued Mr. Wadzinski. "While the number of current shareholders of record would allow us to voluntarily suspend our SEC reporting requirements without these corporate actions, we believe that the reverse stock split and share repurchase program provide an opportunity for many of those shareholders who do not want to own shares in a non-reporting company to convert some or all of their shares into cash."
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