Monday, October 31, 2011

Einhell Gruppe AG

Einhell Gruppe (EIN3.Germany)

Price: €35.64 (10/31/11)

I stumbled upon Einhell through a screen I recently ran at FT.com.  I wanted to find stocks that had decent long term operating stats but had been dragged down in Europe as part of the debt debacle.  I ended up with a good list of stocks that aren't superstars, but are consistent operators that have probably been unfairly dragged down.

The first I want to look at is Einhell a Germany tool manufacturer, I'd love to go to Lowes and personally examine the quality of the tools, but they sell their tools everywhere but North America.  Einhell manufacturers all sorts of power tools for remodeling, such as circular saws, reciprocating saws, drills, sanders, lawnmowers, small greenhouses, and air conditioners.  The company's sales are pretty evenly divided between power tools and lawn equipment.

The company's philosophy is to sell quality tools to the recreational user.  I would think a recreational user is the type of person who has to cut at 2x4 maybe two or three times a year for simple projects.  Although I can't examine any of the products myself I'd probably equate Einhell to something like Harbor Freight Tools.  Harbor Freight is great, you can buy anything there cheap and it seems like a panacea until you use the tool more frequently than it was built for and realize it probably would have been wise to pay up in quality.  This isn't to say that those sorts of tools don't have a place, they do, and the place is in most people's workshops.  The reality is that most tools are used infrequently outside of hard core DIY'ers, and professionals.

Valuation

I was able to find 10yr stats for Einhell via MSN Money, so I want to take a look at the company in light of it's historical results, and I also want to consider the margin of safety for an investor.

I want to speak for just a minute as to why the company is selling at such a cheap valuation.  Einhell has fallen in general with the German market, this is the first and main reason for the depressed valuation.  The second reason is with a depressed market there are fears that consumer goods companies will fall as consumers stop purchasing non essential items.

Einhell sells 38% of their products to the domestic German market, they sell 79% of their products in the EU, and the rest in Asia and Australia.  Even with the European debt crisis the company recorded an increase in revenue at the latest interim statement.  Sales have been growing overseas enough to counter domestic declines.  I believe this finally changed in the most recent quarter, but we'll have to wait until November to see how bad the decline is.

Investment Thesis

I think the thesis for Einhell can be summed up quite nicely in the following stats showing that on a number of different metrics Einhell is selling cheaply:



In addition the company has about €139m in working capital against a market cap of €54m which makes it a net-net.  I didn't screen to find any net-net's, these companies are just somehow attracted to me which I thought was an interesting coincidence.

Since Einhell qualifies as a net-net I through the worksheet would provide a good overview of the current balance sheet.


The composition of the balance sheet is heavily weighted towards inventory and receivables which is understandable for a consumer products company.  Liabilities are composed mostly of bank debt and accounts payable.  There is also a provision account of €14m, this account is mostly held for warranty repair work.

Looking at the net-net worksheet I would say the Einhell balance sheet qualifies as a quasi margin of safety.  In a liquidation scenario with discounted receivables and inventory the company would probably fetch around €7 which is a lot lower than the current market price.  The company also doesn't have much cash on the balance sheet.

10yr Balance Sheet

I recently discovered that MSN Money provides ten year income and balance sheet statements for a lot of different international stocks, so I pulled in the ten year stats for Einhell.


A few things stood out to me when taking a look at the historic balance sheet.  The first was that NCAV has been growing at about a 10% clip over the last decade.  A growing NCAV isn't a bad thing if the growth is due to increasing cash balances or a growth in the equity account, this isn't the case with Einhell.  The growth in NCAV is due to increases in receivables and inventory over the years, a growth in both accounts should be expected to stay roughly in line with a growth in sales.  In the case of Einhell sales have been lumpy for the past decade and current assets have consistently grown, this is a caution flag for me.

The second thing that stands out is that Einhell isn't too heavily indebted.  The company has made further progress on this front reporting that they paid down €20m right after the H1 statement.  I would estimate that the current debt load is in the €25m range or so, which is very manageable.

The last thing to note is the increase in shares outstanding in 2003.  Dilution is always a concern for equity investors and can destroy a margin of safety quickly.  The cause for the 2003 dilution seems to stem from the major loss Einhell experience in 2002.  My guess is their capital ratio went negative and they were required to raise capital to remain in compliance with their listing.  

10yr Income Statement


The historic income statement paints a much better picture of the company than the historic balance sheet.  Einhell is a pretty consistent company, they've had sales in the range of €234m to €417m over the last decade and margins have remained pretty consistent.

In terms of current operating performance Einhell is a bit on the high side of history which is good, the H1 EBIT margin came in at 6.7% and net margin at 4.9%.  It's questionable if those margins can stay high considering the possible downturn in revenue for H2.

Cash Flows

When I took a look at the cash flows for Einhell that's when the thesis started to break down for me.  A company can be wildly profitable but if the cash isn't coming in the door the profits are just a fiction.

Einhell has been very profitable in 2010 and H1 2011, yet when I look at the cash from operations it's been negative the entire time.  Where did the cash go?  The cash all went into increases in working capital, mainly inventory and some receivables.  The shortfall from CFO is accounted for in the dwindling cash balance.

I wasn't able to get a ten year outlook on cash flows, so I had to settle with the five year lookback that FT.com provides.  Einhell seems to be pretty volatile when it comes to cash from operations, and in turn free cash flow generation.  They seem to run in streaks where they will build up working capital and then wind it down.  In some years working off inventory provided a nice boost to cash.  The problem is this isn't a sustainable pattern.  I would rather see a company with consistent inventory balances and consistent cash flow verses a bonanza year and then a few lean years.

When I saw the spotty cash flow record I decided to put Einhell's numbers into my accruals worksheet which is basically a quality of earnings spreadsheet.  The accrual numbers for Einhell aren't pretty:


I like to see accruals to be in the 8% and below range for most companies.  At times there can be exceptions but in the case of Einhell this spreadsheet just confirmed my fears from the cash flow statement.

Where is the margin of safety?

I really like Einhell, I don't really like the lack of cash to back up the accounting profits.  The company is selling for less than working capital yet I kept asking myself if a true margin of safety exists.  I think it does, and I think the margin exists higher up the capital structure at the bank debt level.  I would buy Einhell bonds all day, there is adequate interest coverage, and good asset protection.  At the equity level I just don't have the same level of confidence.

Bottom line

Einhell is a company I'd consider owning if the quality of earnings improved, some of the asset balances declined and the cash started flowing.  I am planning on keeping my eye on the company for Q3 results at the end of November.  What I originally thought was going to turn out to be a great investment turned out to be more of a dud with some future potential.  In the case of Einhell the investment decision didn't rest on any problem with the business, it rested with more of a problem with the financials.

Talk to Nate about Einhell

Disclosure: No position

Wednesday, October 26, 2011

Gencor, selling below net cash, but is there more than meets the eye?

Gencor (GENC)

Price: $7.00 (10/25/2011)

I saw this idea posted over at the ST Report, plugged the numbers into my net-net worksheet and realized this is a company selling for less than net cash in the US.  I have to admit, at first glance when I saw this I was excited, it seemed like the type of company I like to hold, selling for less than cash and profitable.

Basically every single net-net has a problem, it could be a small problem that looks big, or a big problem that looks small.  The trick is identifying companies where the problem appears big but is really small or manageable.  The first red flag for me was that Gencor didn't appear to have an obvious problem, when I see this I get worried.

I want to examine this stock by looking at both the bull and bear case.

Bull Case


The bull case is pretty simple, the company is selling for less than cash and marketable securities net all liabilities.  Here is my net-net worksheet:



In addition to having a fortress balance sheet the company has a good record of profitability.  Here is a look at their profits and a few select margins for the past ten years:

Source: MSN.com

One criticism against the history of profitability is that a lot of the profits come from the marketable securities and operating profits are a bit spottier.  I can accept this argument, but since this is a net-cash stock we're discussing I think any profits are acceptable.

So in summary the stock is extremely cheap, and has a positive ten year history of earning money.  For the past ten years the balance sheet has only grown stronger.

To put a conservative value on the stock I think it's fair to take the cash and securities at face value and add a 8x multiple to earnings.  Taking this approach we have EPS of $.71 at 8x ($5.68) plus the $7.61 in net cash giving a value of $13.29, almost a double from this point.  This is a true dollar selling for fifty cents!

Bear Case

One thing I've really been concentrating on when examining investments is looking at why a company is cheap, and what sort of margin of safety exists.  In the case of Gencor the margin of safety is the discount to the liquid assets, and the fact that the market is valuing the operations at nothing.

The first thing I did was go Googling for why Gencor was cheap and most of the reasons I saw on the internet tied to the fact that the operating company had a spotty history of profitability and the business was a generally poor one.  I can accept this argument but I think it's a bit too simplistic.  There are many poor businesses selling with high multiples, there are even many more businesses that have never turned a profit that are selling well above asset value.

I believe there are multiple reasons behind the valuation discount at Gencor, I want to break each down individually.  First off I want to state that the bear case has been made much simpler thanks to American tax payer dollars, the SEC has asked extensive questions of the company all recorded through EDGAR. Some of the questions are basic, others dig into nitty gritty accounting details.  

1) What exactly is happening with the CFO? - This might not be the most important issue, but it raised the biggest red flag for me, in the past three years the company has had a total of five people in the CFO position, two actual CFO's, two interim CFOs, and one acting CFO.  

Here is a table breaking down the personnel changes:

I should also note that the company failed to file an 8-k on multiple occasions when a CFO or acting/interim CFO left.  

It's odd to me that none of the interim CFO's became full time, and the length of tenure is frightening.  I don't know many people who are hired at a company and feel that in five or six months they've made such an impact that they're ready to move on.  Usually people who move on quickly do so because they realize they are not a good fit at the company, or they feel they're unable to fulfill the role.  

There could be a perfectly valid reason for each CFO leaving, but in total there appears to be a pattern here that's concerning to a potential investor.

2) What is the purpose of the cash? - For any company that is cash rich there is always the possibility that management could squander the cash on failed acquisitions or just plain bungle things destroying shareholder value(MSFT...).  

In a response to the SEC the company states that "The “Acquisition Fund” is an amount of cash accumulated over years by the Company and intended to support its operations, as well as to be used in and when an appropriate acquisition becomes available." 

A response like this is concerning because my margin of safety is the fact that the company can liquidate and return cash in excess of my purchase price.  If the company is planning on using the cash to purchase another company my margin of safety could be destroyed by bad capital allocation.  This is a big risk, and while an acquisition hasn't happened yet it doesn't mean that it's impossible either.

3) Is Gencore an investment company? - In a few of the letters the questioning from the SEC revolves around the idea that Gencor should be classified as an investment company.  The company responds saying they have an engineering bent, and are focused on driving operations.  The SEC response is that while it's nice Gencor is focused on operations a potential investor isn't getting an engineering company they're actually purchasing an opaque securities portfolio.

What's interesting on this point is the SEC says they disagree with the company's classification and basically say they aren't going to argue the point further.  This is a potential risk, investment companies have much different and more stringent regulations than public companies.  Any sort of action by the SEC to classify Gencor as an investment company might force management to unload the marketable securities portfolio; a possibility is a dividend, or a terrible acquisition.  Based on the companies stated purpose for the cash I'd wager a shotgun acquisition is more likely.

4) Questionable receivables accounting - Each of the above items I was able to somewhat justify away but when I hit this item it killed the thesis and shed some light on a possible reason why the company has been through five CFO's recently.

The company claims in filings that "the majority of company sales require payments of cash before shipping" and then go on to claim that approximately 47% of accounts receivable are flagged as a doubtful accounts.  

So right now something should be clicking saying that if customers are required to pay in cash upfront how can 47% of receivables be in question?  I'm not exactly sure, and the company never fully explained it to the SEC's satisfaction either.  Either the majority didn't actually pay upfront in cash, or 100% of the non-majority hasn't paid at all.  Given that 47% is less than a majority I'm leaning towards the notion that most or all of the non-prepaid customer have paid a dime.

That brings us to the next issue which is the status on the doubtful accounts.  Gencor claims to extend credit to clients in the form of receivables financing.  What this means is that a customer can contract for a job and not pay until the job is done, or after the job is done and pay a small interest charge to Gencore.  For Gencore this is considered an account receivable, and as noted above most of those receivables financed are outstanding and according to the filing notes are 90 days past due.  The company states that they are slow to write down bad debts because they continue to hold out hope that the client will eventually pay.  And if they think the client will pay eventually it shouldn't be considered a bad debt.

The logic of this defies me, the company seems to believe the if a client hasn't paid in 180 days but claims the check is in the mail that the receivable is money good.  

Edit: I forgot to put this in the article originally but from the most recent annual report the auditors did not review internal controls whereas in the past they had.  Management was asked by the SEC to include a note to this effect and to certify according to management that the internal controls were sound.

I know there are more items lurking in the accounting, and a few of them are detailed here, here and here in the SEC letters.  But after hitting the four above items I decided to move on from Gencor.  I recognize the company is cheap but I think there are very good reasons for the cheapness, and I think the margin of safety is an illusion with Gencor.

I'm interested in hearing holes in my thinking or answers to the bear questions.  


Disclosure: No position

Tuesday, October 18, 2011

Timber as an investment

I love the woods, I love walking in the woods, camping in the woods, and just being in the woods.  Often when I'm in the woods I consider timberland as an investment, I've been looking at timber on and off since probably 2006.  This past weekend was no exception, as I backpacked in Dolly Sods Wilderness with a friend of mine I started thinking about buying timberland again.

Timberland is an interesting vehicle for investment, as an asset class it has returns of about 7% a year and is an excellent inflation hedge.  In addition the land owner has optionality on when to sell, if prices are depressed they can avoid harvesting for a few years and wait for a rebound.  When the timber is harvested the sale is considered a long term capital gain (in the US) even if the land owner has owned the land for less than a year.  With all these factors timberland seems to be the perfect investment, put all your money in timberland, do a bit of hunting and camping on the land and retire rich.

The problem with that scenario is timberland is a very hard asset to own.  The problem is often tracts of land that support timber production are large and aren't easily broken apart.  Often pension plans and institutions will buy into a large timber tract and contract for harvesting.  There are a few REITs that own land, but none are actual pure plays on land.  This leave an investor with an option to either buy land directly which could cause some portfolio management (and time management) problems, or buy through some sort of exchange vehicle.

As I've mentioned earlier I've had my eye open on small plots of land in Pennsylvania, West Virginia, and southern NY for the past few years.  I haven't purchased yet for a few reasons, the first is the hands on nature of the investment.  I just don't have the time at this point to spend time prepping the land, planting, visiting to make sure everything is ok (i.e. no hunting, no atv trails, no dumping).  The second reason is the difficulty with finding the "right" plot.  If I buy too big of a plot my portfolio is out of balance, at this point I don't feel like I'm ready to bite off 40 acres of woods.  Yet I would need at least 10 acres before I could make any money.  The problem with small plots is they are usually viewed as a lot for building instead of raw land for timber.  This means that small plots carry prices in the $10k/acre price vs the $1200-1400 going price for timber acreage.  Paying anything more than $1400 makes it very difficult to turn a profit.  Finding a small plot for a cheap price is difficult, trust me, I've been looking for the past five years.  If anyone knows of a 10 acre plot in WV or PA for around $8500 or less, let me know!

So what does a piece of land actually look like?  Here is 44.8 acres of land in southern NY for $36k, which comes out to $850/acre; while this is a good deal (includes mineral rights) the problem is the size and maintenance.  For anyone with less than a $720k portfolio this piece of land would be a 5% or bigger position size.  Maintenance costs would probably be low, but a small continual cost, in addition if the owner doesn't live close there would be travel costs as well.

If you give a small tree 10-15 years to grow they can fetch about $500 for pulp, and mature trees (age 25-30 years) 4-5k an acre at current prices.  So at a purchase price of $36k, sitting for 25 years and selling the wood for $225k ends in a return of about 6.7%.  Factor in the ability to sell the land for probably close to the purchase price and we have a 7.2% gain over the life of the investment.  There is probably also a value to the mineral rights which I'm not including.  This is a great number for something completely uncorrelated with the markets.

The downside is an investor now has $36k tied up in Ripley NY, what happens if that plot gets hit by a tree disease, or has the soil go bad, or a multitude of other things?  This is a large concentrated risk, and an investor needs to hold for a long time 25-30 years to make a decent return, not something many people have the fortitude to do.

So what's the alternative to owning small plots directly?  I found two closed end timber funds that are about as pure play as possible, they both operate in the US but trade on the London Stock Exchange.  And as expected for something posted on this blog, both funds are trading at a discount to net asset value.

The table below breaks down each fund:


Buying at the current prices the investor is getting timberland cheaper by buying Phaunos.  The caveat with Phaunos is that some of the plots they are a minority holder whereas with Cambium they own the acreage outright.

Phaunos is a bit of a strange fund, the fund trades on the LSE in dollars which is something not all brokers can trade easily.

Owning timber in a fund is a bit different from a direct holding.  In a fund the managers are constantly working to manage the land holdings to ensure a return for shareholders.  In the direct scenario nature takes it's course and the return materializes as the trees grow and are eventually cut down.

One risk I haven't mentioned yet is the risk that these funds could be a fraud.  Recently there was a story of a Chinese timber company Sino-Forest which falsified the size of their land holdings.  This could be true with both closed end funds as well, and is most likely the reason for the discount to NCAV.  

I enjoyed reading the filings for both companies, but would prefer a direct holding of timber personally.  If the land is close enough I can enjoy it while waiting on investment to grow, something I can't do with a fund.


Disclosure: No positions

Thursday, October 13, 2011

PostNL spinoff opportunity in the parent

PostNL (PNL.Netherlands, TNTFF)

Price: €3.21 (10/13/11 intraday)

This company might sound familiar to readers, I discussed the divested division a few months back with a post on TNT Express.  Let me back up a minute, up until May of this year there was a Dutch company TNT which operated express shipping and local delivery of parcels and mail.  Mail delivery was in the Netherlands, parcel delivery in Germany, Italy, Netherlands and UK, and Express delivery worldwide.  At the end of May Express was spun out which PostNL retained a 30% stake.  PostNL is the non-express local mail/parcel delivery in the Netherlands.

The reason that TNT Express was spun off was that Express and PostNL had grown into two different businesses, one struggling with growth, the other decline.  The directors realized this and split the companies, as the company itself states Express is now a growth stock and PostNL a value stock.  PostNL has been hit by selling due to European fears, in addition they've been hit with selling as investors dump their shares in a seemingly dead or declining business.

I first want to look at the volume decline assumption that PostNL will experience such a precipitous drop in mail that they'll go bankrupt.  While this is possible I don't think it's probable.  PostNL expects mail volumes to drop in the mid single digits over the next three years, and in the low single digits five years out.  Coupled with the decline in mail volume they are estimating an increase in both parcels and international mail.  All of these numbers together volume estimates are running break even for the next three years, and slowly growing five years out.

It's important to note that the volume estimates are provided by the company itself, and naturally they are optimistic.  What's also important to realize is the estimates were made this summer when Europe was in the same financial uncertainty that they're currently in, which gives creedence to the fact that the volume estimates might be somewhat accurate or at least not wildly optimistic.

Value Proposition

The thesis for this investment is really very simple and I don't feel it needs to be broken down in a lot of excel files or charts.

TNT Express has a market cap of €2.808b and PostNL a market cap of €1.286b.  PostNL owns 29.9% of Express, so if we back out that value we are left with the market valuing the business of PostNL for €446m.  Let me break down how low of a valuation this is, PostNL earned €120m in net income in Q1 of this year on a 8% slide in post volume.  They had €84m in operating cash flow in the first quarter alone!  In Q2 they experienced a loss and operating cash flow for the half year was at €69m.  The loss in Q2 was due to a writedown in the value of the Express asset.  The company expects to have €170m in cash operating income at the year end, giving the company a 2.62x multiple of business to cash operating income.

In addition the company plans to pay out €150m a year in dividends which is currently a 11.6% dividend yield.  If we assume the yield is only on the PostNL business it's more like a 33% yield.

The Risks

So what are the risks?  There are a few, and I'll try to talk through each.

The first risk is that the Express holding will continue to be marked down impairing the profits of PostNL.  I think this is one of the bigger risks that has market participants wary.  A writedown will depress net income, but cash flow is unaffected.  In my analysis above I looked at what the value of Express is today, not the book value, so we've already accounted for any sort of writedown.  I don't think this aspect is that big of a deal.  Stand alone Express is already trading below book value, and looks cheap, I highly doubt the company is worthless.

The second risk is the decline in volumes I mentioned earlier.  This is truly the biggest risk for an equity investor, if volumes continue to slide 8% YoY eventually fixed cost will loom large and PostNL won't be able to service their debt and will become bankrupt.  The current view is that mail is dead or close to dead and this death will kill PostNL slowly as volumes drop.  While this is a valid view PostNL is working on growing parcel service in Germany, UK, and Italy and parcel volume is growing.  To counter act the mail volume dropping PostNL has been downsizing operations to pace with the volume decline.  As mail volume has been declining expenses related to mail volume has been declining as well.

The next risk is the pension, PostNL has a nice sized pension plan which will require €125m in contributions in 2011 alone.  The pension is currently 112% funded which isn't much of a concern, the concern is that the contribution amount can be viewed as a fixed debt payment.  PostNL needs to continue paying €125m each year or the pension will become unfunded and will be a liability in front of equity holders.

The last risk is the European risk, which is that somehow with Greek or Portuguese defaults people will stop buying from Amazon, stop receiving birthday cards in the mail, and life in general will completely stop.  I know I'm minimizing some, but defaults or not PostNL will continue to operate, and in this rough environment so far they've been executing at an acceptable level already.  I think this is a risk in the sense that no one knows the outcome, but at the same time this is the reason we're presented with such an investment opportunity.

Here is a link to the latest half year results which include the financial statements: HY and Q2 results

Talk to Nate about PostNL or TNT Express

Disclosure: Long TNT Express, considering a position in PostNL

Monday, October 3, 2011

Examining why Addvantage is cheap

ADDvantage (AEY)

Price: $2.26 (10/3/11)

After reading the bull case over at Whopper Investments blog the story seemed too good to be true, a company selling for less than NCAV and with excellent ROA/ROE.  Whopper doesn't discuss why the company is trading at a discount so I thought I'd take a stab at it myself.

The reason I'm doing this is because I believe most or all value investments have a problem, a big visible problem.  Value investing is determining that the visible problem doesn't matter as much as the market thinks it does, and can look beyond it.

Whopper has a great overview on the company and some financial details.  I will highlight a few points which are key to understanding the rest of this article.
-AEY trades at $2.26 against a NCAV of $2.57/sh
-The company buys and resells used router equipment and used cable tv equipment.
-They carry a large inventory of older or obsolete inventory as a value proposition to clients looking to replaced a failed device without needing to upgrade.
-The routers are sold without software, or the brain center of the router.
-AEY recently entered into a new reseller agreement with Cisco redefining the terms of their agreement.

So why is this company cheap?

Is is misunderstood? - This category has been my bread and butter of net-net situations, a company will have poor earnings but have a large slug of cash or marketable securities that the market is missing.  The market will focus on the earnings story missing the fact that the company is trading at a discount to liquid assets.  This isn't the case with AEY, they have a nice amount of cash and inventory but there are no hidden assets here.

Cable TV subscriptions declining - Call this the Hulu/Netflix effect, households are canceling cable and signing up for streaming services.  I know this is true in our house, we don't have cable, just Netflix.  I don't know how strong of an effect this will be in the long term, but it seems to be popular currently.

The real reasons

Sales have fallen off a cliff - As of the most recent quarter revenue was down 35% YoY and new equipment sales were down 41%.  In addition refurbished sales fell 23% in the most recent quarter.

It's difficult to understand or know exactly why revenue is down, management blames the drop on the weather, frozen capex at clients and the new partnership agreement.  I'm dubious of a management that blames poor router sales on the weather.  I don't know of any companies that postpone sales due to severe weather, it's actually the opposite.  If clients were in severe weather areas I would expect to see an increase in sales replacing damaged equipment.

The sales numbers are terrible in light of the fact that Cisco's sales have been increasing over the same period of time.  The conclusion I draw is that Cisco has the cream of the crop customers while AEY has some of the bottom rung customers who's wallets are still tight.  This leads into our next point..

Limited ability to sell to certain customers - As part of the new partner contract the company agreed with Cisco to not sell to certain customers.  The documents don't outline exactly who those customers are but from my experience the limitations are usually on bigger accounts.  So Cisco would service the Time Warners and Comscasts while Addvantage services smaller regional cable companies.

In addition to the limitation on certain customers Addvantage is also limited in their geographic range, the new agreement limits their ability to sell internationally.  I'm not sure how big of an impact this is but management called it out specifically in the notes mentioning that they had previously sold outside of the US and this would no longer be possible.

Change of business strategy resulting in higher costs - As part of the new partnership agreement Addvantage will no longer have to carry as big of an inventory which is a good thing, the side effect is equipment costs will be higher going forward.  The higher equipment cost will cut into margins and is a permanent change not something temporary that will reverse.  Like many of the other things the impact of this isn't broken out exactly.

Why buy Addvantage when you can buy Cisco?

As I looked into Addvantage it became very clear to me that the company lives and dies by Cisco, if something were to happen to Cisco I'm not sure they would be able to survive.  Secondly Addvantage is selling Cisco routers without any routing software which is the brain center of the device.  A router is nothing more than a collection of ethernet cards, the software determines efficient routing of data and the feature set available to a user.  Anyone can build a cheap router with an old Linux computer and some discount NIC cards, but the reason people pay Cisco so much money is for their IOS software that runs the router.   Customers purchasing from Addvantage still need to purchase IOS and license the software from Cisco before they have a working item.

In thinking about this I decided to put together a few stats of Addvantage side by side with Cisco:


Addvantage is clearly cheaper than Cisco, and this begs the question for me, would I rather own Cisco at a 25% discount or Addvantage at a 50% discount.  I'm not sure, and don't own either, but I'd love to hear thoughts either way.


Disclosure: No positions