By Whopper Investments

ADDvantage Technologies (AEY) is a value stock I’ve talked about on this site before. Despite a consistent history of profitability- returns on tangible assets (EBIT / tangible assets) have averaged over 17% for the past five years, and they’ve been profitable for each of the past ten- the company is trading well below their new current asset value.

AEY reported earnings this week. Earnings remained positive, but both revenue and earnings came in well below last year. Your big worry at this point is AEY’s inventory represent ~50% of their asset and more than one years worth of revenue at their current run rate s. This huge inventory position is related to AEY’s “on hand on demand” strategy, where they keep a huge inventory position so they can meet their customers emergency demands. This strategy allows them to earn very nice gross margins and, traditionally, excellent ROA.

However, given their recent revenue slow down, an investor’s big worry today has to be the inventory position is impaired/obsolete and will need a write down.

Even with the possibility of an inventory impairment looming, I still think shares are too cheap. The company is profitable, and they’re starting to do a nice job of liquidating working capital to generate cash as business continues to slow. I view it as a “heads I win, tails, I don’t lose too much (or maybe even make a little)” situation. Management seems convinced their customers are putting off needed upgrade and expansion work due to the sluggish economy but will eventually be forced it increase cap ex. If they’re right, AEY is poised for massive growth when that happens.

If they’re wrong and the business never comes back, you’re likely looking at an inventory right down. But AEY currently has a book value of $3.45 and net current assets per share of $2.55 and they’re profitable… if this situation comes of play and inventory needs to be impaired, AEY would likely still trade below their new book value. Given their past history and the fact their still generating decent profits, I don’t think this is a business that deserves to trade below book.

Bonus note- during the quarter, AEY made a small acquisition. They acquired a company with $6m in annual revenue for $565k. They didn’t give much disclosure so it’s tough to comment too much on the acquisition, but given the low P/S, it’s tough to see how the acquisition could be disastrous to shareholders.

Disclosure- long AEY