TJT, Inc. (AXLE) is the classic entrepreneurial company, still run by its 1977 founder, Terrence Sheldon. We have been following the Company for over a decade and have been impressed by how effectively Mr. Sheldon has managed the Company through the brutal manufactured housing depression following the 2007 financial crisis. Management has done whatever was needed to ensure that the Company would not only survive but would be positioned to thrive once the inevitable recovery came. The recovery has now arrived and the Company is now reaping the fruits of its labor, as earnings have recovered and are expected to grow robustly over the coming years.
TJT purchases used axles and tires from manufactured home dealers and transporters throughout the western United States. The axles and tires are detached from the manufactured homes when the homes are delivered to their location by the dealer. The Company also buys axles and tires from independent brokers. The Company, as required by Federal regulations, inspects and reconditions these axles and tires. Under Federal law this running gear must be refurbished or replaced after each trip. The Company sells this reconditioned gear to home factories for reuse, thus recycling materials that were once relegated to landfills and scrap yards.
The Company operates mostly in the Pacific North West (Idaho, Washington, Oregon, California, Nevada, Utah, Montana and North Dakota) where it holds approximately a 30% share of the market in this eight state region. The Company also sells manufactured housing accessories to manufactured housing dealers and contractors. In addition, the Company also provides customers with new axles and tires to meet customer needs and to replenish the supply of refurbished axles as the supply diminishes.
The Company deregistered in 2005, but has continued to provide outside investors with excellent disclosure, releasing quarterly press releases and financial statements and annual proxy and audited financial statements.
Fiscal 2014 Results
Fiscal 2014 was a strong recovery year. Net Sales increased 53% during fiscal 2014 (period ending September 30, 2014). Sales of axles and tires increased 114% and sales of accessories increased 3%. The Company easily beat the growth in the manufactured housing industry which grew about 9% during the calendar year 2014. Gross margins remained stable at around 28%. Despite the large increase in sales the Company effectively controlled SG&A expenses with these expenses essentially unchanged in 2014. The Company reported a pre-tax profit of $248,000 ($.05/ share) in 2014 compared to a loss of ($341,000) (($.08) per share) in 2013.
The manufactured housing industry results are seasonal for the majority of the TJT’s market area. Generally, sales for the months from November to March are much lower than for the rest of the year due to poor weather and ground conditions. The Company has historically recorded its highest sales volume in the quarters ending in June and September. The Company recently reported results for its first fiscal quarter ending in December 2014. We don’t give much importance to these results since, as noted above, the fiscal first quarter is part of the Company’s seasonally slow season. Net sales decreased 11% during the quarter, as compared to last year. Net income was essentially break-even. Terry Sheldon commented, “While our results were affected to some extent by seasonal factors, we look forward to improved results as the year progresses.”
Terrence Sheldon and Paul Smith, the Company’s CEO and CFO respectively, own a combined 58% of the Company’s outstanding shares. Their salaries in fiscal 2014 were $34,000 and $43,000, respectively. They, thus, have directly participated in the Company’s aggressive expense reduction by keeping their compensation at minimal levels, demonstrating their commitment to shareholders and the success of TJT.
Despite many years of poor results and difficult market conditions, the balance sheet remains pristine. At the end of the first quarter the Company had $2.25 million of current assets, including $141,000 in cash. Total liabilities were $476,000, including $194,000 of short term debt to finance the build in inventory needed to support the Company’s imminent busy season. The Company has no long term liabilities. The current ratio was a robust 4.73 and tangible book value was $2.8 million or $.62 per share.
We find the company’s valuation to be attractive. The Company earned $.05 per share in 2014 and we would expect growth to about $.08 per share in 2015. On a P/E basis the shares are selling for about 10 times last year’s earnings and six times this year’s expected earnings. We believe we are purchasing the shares at the beginning of the Company’s growth cycle.
The Company’s tangible book value is $.62 per share. Thus the shares trade for about a 19% discount to book value. The Company liquidation value, as represented by net current assets, is $.39 per share. The shares thus trade at a modest premium of 28% to liquidation value.
This is thus an easily understood proposition:
1) We have a Company in a cyclical and easily comprehensible industry at the beginning of its growth cycle.
2) We have a management team that is minimally compensated and whose reward is completely tied to the share price and aligned with outside shareholders.
3) We have a stock price that we believe, does not reflect the fair value of the shares. The shares sell for about six times this year’s expected earnings and at a 19% discount to the Company’s book value.
4) Finally, management has demonstrated their ability to mitigate the down-side and effectively manage the Company through treacherous market conditions.
1) With 58% of the shares outstanding and a classified board, management effectively controls the Company and shareholders have minimal power to influence management.
2) The Company is very small with a market capitalization of only $2.3 million. The shares are illiquid and purchase requires patience.
3) The Company is in a competitive cyclical industry.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise do not hold a material investment in the issuer's securities.
1) Excellent performance in 2015.
2) Company pays a dividend.
3) Management decides to take Company private.
4) The Company's cheap valuation is discovered by the market.