In Peter Lynch’s bestselling book, One Up On Wall Street, he comments that the boring businesses are generally the ones that make the best investments. In addition, Lynch believed that boring businesses with a niche or specialist product are almost perfect from an investment perspective. This is why I’ve decided to take a look at Avalon Holdings Corp.
Avalon Holdings Corp (NYSEMKT:AWX) provides hazardous and nonhazardous waste brokerage and management services as well as landfill management services. The company offers its services to industrial, commercial and government customers throughout the United States. In addition, the company operates and manages golf courses, fitness centers, tennis, spa services, dining, and banquet facilities, as well as a travel agency. The company has a market capitalization of $19.3 million and an average daily volume of 3,650.
Looking at the balance sheet, it would appear that Avalon Holdings Corp (NYSEMKT:AWX) is a fiscally stable company. Current assets cover current liabilities 1.8 times and debt is almost non-existent. Debt-to-equity is only 1%. Actually, net-cash works out at around $2.10 per share.
The company’s book value per share is $10.7, which means at current prices Avalon is trading at a price-to-book value of 0.5.
Avalon Holdings performance
Due to the fact that Avalon Holdings Corp (NYSEMKT:AWX) is a service company, profit margins are razor thin and operational gearing is high. Indeed, for full-year 2012 the company’s EBITDA margin came in at only 2.5%. This means that depreciation has a huge effect on the company’s overall profitability. Including depreciation and amortization, the company reported a loss for the year.
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Stripping out non-cash items, Avalon Holdings Corp (NYSEMKT:AWX) was cash flow positive during 2012 and has been throughout the first nine months of this years. The company’s cash balance expanded 25% year-on-year through to the end of the fiscal third quarter.
Still, during the past four years, Avalon’s earning have been somewhat erratic, swinging between a small profit and small loss, but cash generation has averaged around $1 million per year, or 2% of revenues.
Avalon Holdings outlook
Avalon Holdings Corp (NYSEMKT:AWX) has two main divisions, waste management and golf plus related operations. Golf plus related operations includes fitness centers, tennis, spa services, dining, and banquet facilities, as well as a travel agency. This is the low margin part of the business, and as with any services operation, margins are tight and operational gearing is high.
In particular, according to the company’s most recent 10-Q, waste management services contributed $12.5 million, or 76% of revenues with golf and related contributing the remaining 24%. However, golf and related only contributed 14% to net income. Management is working to try and improve custom services at golf centers, although so far targets have not been met, holding back growth.
Still, the sate management side of the business continues to perform well. The division has a strong net income margin as covered above and management is trying to drive growth. In particular, Avalon is seeking to capitalize on the domestic oil boom and was recently granted permission to construct and operate two salt water injection wells on a number of properties the company purchased back in 2011. These wells will allow Avalon to offer disposal services of brine waters from oil & gas drilling activities, giving the company another waste management niche.
So overall, Avalon Holdings Corp (NYSEMKT:AWX) is a solid business trading below book value with a stable balance sheet. The company is active in the highly competitive waste management sector and is cash generative. In addition, Avalon is seeking growth by riding the domestic oil boom.