TNR Technical (TNRK.PK): A Bargain stock
TNR Technical is a value added distributor of batteries.
Boring sales record .Gross margins have remained consistent over the years but operating margins have declined in the recent 4 years.
Margin contraction is one risk as we will see later. But as we said earlier, for a net –net ,this type of record is really fair.
Return on Invested Capital
YEAR Operating income Invested capital ROIC
2011 $5,86,710.0 $26,01,723 19.66%
2010 $5,59,905.0 $29,84,161 19.19%
2009 $8,78,731.0 $29,17,534 31.41%
2008 $11,55,016.0 $27,97,222 46.00%
2007 $12,09,886.0 $25,11,040 56.64%
2006 $7,79,972.0 $21,35,916 36.48%
2005 $7,04,081.0 $21,38,238 31.03%
2004 $8,45,364.0 $22,69,267 44.82%
2003 $7,88,212.0 $18,86,105 36.83%
2002 $21,40,013
YEAR EBIT/SHARE
2011 $1.67
2010 $1.93
2009 $1.88
2008 $3.04
2007 $4.13
2006 $4.47
2005 $2.96
2004 $2.73
2003 $3.33
2002 $3.18
That's an average of $2.93 per share.
Of course what it earns in the future is what will translate into gains for investors of today. But the track record demonstrates the Company's earning power.
The Company's Enterprise Value is $4.57 per share.
The stock is trading at EV/EBIT of 2.74 (trailing 12 months)
and EV/ 10 year average EBIT of 1.56
That's cheap.
So we have a good discount relative to earnings- which gives us a good upside potential.And a good discount relative to assets which gives us a good downside protection.
Another positive point to consider in TNR is that insiders hold significant stake.
TNR Technical is controlled by Thaw Family .Wayne Thaw,the chairman of the board and the CEO owns 30 % of the stock.
Mitchel Thaw, his brother - who serves on the board of directors-owns 7% of the stock.
Their father Norman Thaw owns 17%.
So Thaw Family owns 54% of the stock in TNR .
Mr.Paul Sonkin , the fund manager of Hummingbird Funds owns 21% of the stock. He is a micro cap value investor in the tradition of Graham and Dodd.
Another good point about TNR is that it has a history of returning excess cash to the shareholders.
TNR Technical has paid special cash dividends in the past: $6.50 per share in 2010, $6.75 in 2008 and $4.75 in 2007.
As the cash-pile builds up on their balance sheet , there is a high probability that it may declare more dividends in the future.
Generally, one of the risks with small businesses like these is customer concentration.
Few customers that account for majority of sales. TNR,on the other hand has a wide customer base. Their 10-K states:
“No one customer accounted for 10% or more of the Company’s total revenues”
But that's not to say that the investment is devoid of any risks.
The company lacks pricing power. As it competes with large number of regional distributors and battery manufacturers it could face significant pricing pressure in the future.
These pricing pressures , as their 10 –k candidly says: "have prevented us from fully passing through to customers increased costs related to increased pricing of raw materials associated with the manufacture of batteries, such as nickel and lead."
It purchases batteries from the manufacturers, assembles and sells them to a variety of customers like electronic wholesalers, resorts, hospitals , churches ,police and fire departments , OEMs etc
The Company also designs and manufactures battery packs to customers’ specifications. These batteries have applications in utilities, personal watercraft, photography, watches, instrumentation, laptops, surveying equipment, radio control, mobile radios, alarms, U.P.S., door locks, and emergency lighting as well as other various consumer products.
Established in 1979, the Company is an authorized distributor of nickel-cadmium, nickel metal hydride, alkaline, lithium and sealed lead acid batteries manufactured by Saft America, Power-Sonic, Varta Micro-battery, Enersys, Renata, GP Batteries, CSB Battery, Ultralife Batteries, Energizer Battery, FDK and Sanyo Energy.
TNR’s stock price currently hovers around $11.50 and imparts the Company market cap of just $3.5 million. That makes it a nano-cap and is probably one of the reasons of its stock being mispriced.
So we would start our analysis with safety scores .
Altman Z-score
calculation Points
A, Working Capital/Total Assets 1.02
B, Retained Earnings/ Total Assets 0.33
C, EBIT /Total Assets 0.36
D, Market Cap / Total liabilities 3.56
E, Net Sales/ Total Assets 1.95
Z- score 7.22
The Z score above 3 is considered safe .As we can see here that the score is bolstered by ratio of market cap to total liabilities. (item D).The absence of long term debt and very low total liabilities of just $595K relative to its current assets of $4.5 million makes this a safe stock.
F-score
1 Net Income 1
2 Cash flow from Operations 1
3 Change in ROA 0
4 Quality of Earnings 1
5 Change in Debt leverage 1
6 Change in Current ratio 0
7 Change in Shares Outstanding 1
8 Change in Gross margin 0
9 Change in Asset turnover 1
F score 6
TNR’s F –score of 6 is decent too. The key measures of trend in Net income, Cash flow from operations and quality of earnings in the score are all positive.
What makes TNR Technical a bargain?
Assets Perspective
Total current assets stand at $14.93 per share.This includes $6 per share in cash.And total liabilities are $1.94 per share.
That gives Net Current Asset value of $12.99
That gives Net Current Asset value of $12.99
At the current quote Price/NCAV comes out to be 0.89 .This makes it a net-net.
Tangible book value is $13.31 so price to TBV comes out to be 0.86
Earnings Perspective
Peek at the retained earnings of the past balance sheets of net nets, and mostly you will find a negative number sitting there. Most of the net nets-especially American- have an ugly earnings record.
For a net net we are not actively looking for a great business . Just a decent no-loss making business.
TNR is precisely that. There have been no operating losses in the last 10 years. Actually,it can boast of this positive record for straight 17 years.That's something very rare to get in a net net.
Here is the record:
Year Sales Gross Profit Gross Margin Operating Profit Operating margin
2011 $91,55,658 $26,41,447 28.85% $5,13,538 5.61%
2010 $93,47,412 $28,32,485 30.30% $5,86,710 6.28%
2009 $87,34,297 $25,72,335 29.45% $5,59,905 6.41%
2008 $93,61,530 $29,52,217 31.54% $8,78,731 9.39%
2007 $96,15,164 $30,68,468 31.91% $11,55,016 12.01%
2006 $97,24,432 $29,60,047 30.44% $12,09,886 12.44%
2005 $73,17,700 $21,62,466 29.55% $7,79,972 10.66%
2004 $79,96,613 $22,11,838 27.66% $7,04,081 8.80%
2003 $81,78,802 $22,73,443 27.80% $8,45,364 10.34%
2002 $79,08,632 $21,33,458 26.98% $7,88,212 9.97%
Margin contraction is one risk as we will see later. But as we said earlier, for a net –net ,this type of record is really fair.
Return on Invested Capital
YEAR Operating income Invested capital ROIC
2011 $5,86,710.0 $26,01,723 19.66%
2010 $5,59,905.0 $29,84,161 19.19%
2009 $8,78,731.0 $29,17,534 31.41%
2008 $11,55,016.0 $27,97,222 46.00%
2007 $12,09,886.0 $25,11,040 56.64%
2006 $7,79,972.0 $21,35,916 36.48%
2005 $7,04,081.0 $21,38,238 31.03%
2004 $8,45,364.0 $22,69,267 44.82%
2003 $7,88,212.0 $18,86,105 36.83%
2002 $21,40,013
That's an average ROIC of 35% . Of course it could be difficult to sustain this kind of ROIC in future . But this proves that business is not worthless as Mr .Market is valuing it . Certainly, TNR is more valuable than its net current assets .
Here is the 10 year EBIT record:
YEAR EBIT/SHARE
2011 $1.67
2010 $1.93
2009 $1.88
2008 $3.04
2007 $4.13
2006 $4.47
2005 $2.96
2004 $2.73
2003 $3.33
2002 $3.18
That's an average of $2.93 per share.
Of course what it earns in the future is what will translate into gains for investors of today. But the track record demonstrates the Company's earning power.
The Company's Enterprise Value is $4.57 per share.
The stock is trading at EV/EBIT of 2.74 (trailing 12 months)
and EV/ 10 year average EBIT of 1.56
That's cheap.
So we have a good discount relative to earnings- which gives us a good upside potential.And a good discount relative to assets which gives us a good downside protection.
Another positive point to consider in TNR is that insiders hold significant stake.
TNR Technical is controlled by Thaw Family .Wayne Thaw,the chairman of the board and the CEO owns 30 % of the stock.
Mitchel Thaw, his brother - who serves on the board of directors-owns 7% of the stock.
Their father Norman Thaw owns 17%.
So Thaw Family owns 54% of the stock in TNR .
Mr.Paul Sonkin , the fund manager of Hummingbird Funds owns 21% of the stock. He is a micro cap value investor in the tradition of Graham and Dodd.
Another good point about TNR is that it has a history of returning excess cash to the shareholders.
TNR Technical has paid special cash dividends in the past: $6.50 per share in 2010, $6.75 in 2008 and $4.75 in 2007.
As the cash-pile builds up on their balance sheet , there is a high probability that it may declare more dividends in the future.
Generally, one of the risks with small businesses like these is customer concentration.
Few customers that account for majority of sales. TNR,on the other hand has a wide customer base. Their 10-K states:
“No one customer accounted for 10% or more of the Company’s total revenues”
But that's not to say that the investment is devoid of any risks.
The company lacks pricing power. As it competes with large number of regional distributors and battery manufacturers it could face significant pricing pressure in the future.
These pricing pressures , as their 10 –k candidly says: "have prevented us from fully passing through to customers increased costs related to increased pricing of raw materials associated with the manufacture of batteries, such as nickel and lead."
And there are low barriers of entry.
Lines to hate in their 10-k :
“We expect heightened competitive pricing pressure as Chinese
manufacturers expand their export capacity and increase their marketing presence in our markets. Our ability to maintain and improve our operating margins has depended, and continues to depend, on our ability to control and reduce our costs.”
and
" Battery wholesale distributors face increased competition as offshore (specifically China) and U.S. manufacturers continue to sell directly into the marketplace alongside an increasing number of web based operations and expanding local battery franchises. Competitors continue to price their products aggressively which has a direct impact on the Company’s overall sales and gross margins."
Notably, One key competitive advantage they have is the ability to fulfill their orders quickly. Customers are willing to pay them for the convenience they offer, for very low lead time which is due to efficient inventory management. So they have a proven business model.
And high insider ownership and high compensation make management very well incentivized.
Bear in mind that due to low float the stock is very illiquid and could be extremely volatile. Also it trades on the pink sheets. But if you are or aspire to be a true value investor -you will have to seek out market’s most inefficient pockets and make volatility and illiquidity your friends.
To recap—good Z and F scores, high insider stake, satisfactory earning power, efficacious business model and decent discount relative to assets and earning power make TNR Technical a solid net –net pick.
