ADDvantage Technologies (AEY) was written up in VIC in January of 2013 when the shares

were at $2.17 per share and before that in September 2010 when it traded at $2.94 per share. I think it’s

time we give these, now highly undervalued, shares a reevaluation.

 

In this iteration the circumstances are very different. The shares now trade at $1.32 per share

which represents about 70% of net current assets or liquidation value (Note: this gives zero value

to its significant real estate holdings.) and at 51% of tangible book value. So the story now

changes from an earnings story to a deep value turnaround story and one of the rare stocks in this

expensive market selling materially below liquidation value.

 

services to cable operators. In addition, it offers telecommunications customers decommissioning

services for surplus and obsolete equipment.

 

Several subsidiaries, through their long-standing relationships with the original equipment

manufacturers (“OEMs”) and specialty repair facilities, have established themselves as value-

added resellers (“VARs”). AEY has a reseller agreement with Arris Solutions to sell cable

television equipment in the United States. AEY is one of only three distributors of Arris

broadband products. They are also a distributor of Cisco video products as a Cisco Premier

Partner, which allows the Company to sell Cisco’s IT related products. In addition, AEY is a

designated as an authorized third party Cisco repair center for select video products. Other

subsidiaries also sell products from other OEMs including Alpha, Blonder-Tongue, RL Drake,

Television (“Cable TV”) and Telecommunications (“Telco”). The Cable TV segment sells new,

surplus and refurbished cable television equipment to cable television operators (called multiple

system operators or “MSOs”) or other resellers that sell to these customers throughout North

America, Central America, South America and, to a substantially lesser extent, other

international regions that utilize the same technology. In addition, this segment repairs cable

television equipment for various companies. The Telco segment provides quality new and used

equipment, to its customer base of telecommunications providers, enterprise customers and

resellers by utilizing its inventory from a broad range of manufacturers as well as other supply

channels. In addition, this segment offers its customers decommissioning services for surplus and

The best way to get a good handle on prospects for 2018  is, I believe, is to quote the assessment of the

Company’s CEO, “We see significant room for further growth in our Telco segment, specifically

at Nave Communications, which reported a disappointing sales performance in fiscal 2017. We

have identified the challenges faced by Nave and are directing resources into improving

its sales infrastructure to allow it to expand both its end-user and reseller customer base in order

to increase sales. This strategy is well underway, driven by our new VP of Sales. We remain confident

that Nave has a fundamentally sound business model and look forward to seeing the impact of our strategy

as it takes hold over the next few quarters. Sales from the Cable TV segment were down in the fourth

quarter of fiscal 2017, reflecting fluctuations in demand that are typical for the industry. However, the

Cable TV segment’s overall performance throughout fiscal 2017 still generated consistent, positive earnings

and remained flat relative to fiscal year 2016 results. While we are pleased with the consistent positive cash

flows that the Cable TV segment generates, we are pro-actively working to continually improve operational

efficiencies and to maximize the profitability of this business,” continued Mr. Humphrey.

 

“Looking ahead, we have implemented a plan focused on improving results in the Telco segment

and continue to implement our strategy to grow the value of our business. We anticipate that Nave’s

sales initiatives will serve to expand its customer base which, combined with Triton’s diversified offering

and strong sales capabilities, will enable us to achieve stronger revenue growth as we progress through

fiscal 2018. In addition, although we believe that the Cable TV segment revenues will be down again next

quarter, we are working consolidating some of our facilities in order to efficiently manage costs and

support margins,” concluded Mr. Humphrey.

 

Revenues for the first fiscal quarter of 2018 were flat to last year. Improvements in the Telco division offset a decline in the Cable TV segment. Titron, the recent acquisition, is performing well with improved revenues and gross margins versus last year. Nave communications, a 2014 acquisition, is also beginning to show improved results. My Humphrey was very positive in the prospects for improving result for the coming quarters.

 

As for the balance sheet, we have a current ratio of 4.2  and only $1.7 million of a long term notes payable. Net current assets are $1.89 per share and tangible book value is $2.59. In addition, the Company owns 162,500 square feet on ten acres of office space, warehouse and service center at Broken Arrow, Oklahoma. It owns 8,000 square feet of land and offices in Deshler, Nebraska. AEY  owns 12,000 square feet of office, warehouse and service facility in Warmister, Pennsylvania, near Philadelphia. It owns a 60,300 square foot facility Sedalia , Missouri. Finally it owns additional facilities in Suwanee, Georgia and New Boston, Texas. The important point here is that this is a solid book value made up of real marketable assets.

 

Management owns 31% of shares outstanding and can be expected to be sensitive to shareholder concerns. Mr. Humphrey was paid a total compensation package of $280,000 last year, which is not unreasonable. Mr. Chymiak, Chief Technology Officer and major shareholder (26% od shares outstanding), was paid $338,000, which I consider mildly high for his position. But, it does seem that shareholder interest and management interest are aligned.

 

 

So the AEY, situation is very simple. We have a Company operating in a competitive environment who has managed to run in the break even range during the last few years. The Company is a major player in its niche market and is hopeful of materially improving results. The balance sheet is in excellent shape with ownership of land and facilities all over the country. All of this would not be too exciting, until you consider that the shares trade at a 30% discount to conservative liquidation value (giving zero value to the land and facility ownership) and at 51% of book value. Hence, the downside is fully reflected in the share price and liquidation would clearly yield substantially more than the share price. Any modest success in generating profits would lead to a major move in the share price. We have a large margin of safety, limited downside and a possibility of sharp rise in the shares. This is extremely rare in the current market.

 

 

Concerns:

 

1) The shares are not very liquid and the total market cap is small.

2) Management may find it difficult to return to profitability.

3) Management may exercise undo influence in the management of the Company with its 31% ownership.

4) The Company operates in a competitive environment.