Tuesday, January 3, 2017

ADDC is Getting Cheaper

We got the Addmaster (ADDC) annual report in December and I went to the annual meeting.  It was a good year.  With another million in the bank and some talk of a tender I think this stock is worth twice the current price.

If you are unfamiliar with ADDC please read my previous post: ADDC on sale for less than cash.  The company is dark and sends an annual report only to shareholders.  They make small printers with their main legacy business being bank printers, the kind that prints onto the check you hand the teller.  Addmaster owns 50.15% of Clary Corporation.  The remaining shares of Clary are held by the two brothers, John and Hugh, who run ADDC.  Clary makes high quality UPS systems, mainly for military and traffic applications.  The whole thing is run by John and Hugh Clary who inherited from their father; I think they hold about 70% of the ADDC shares.

It's a family business run by very nice people.  Would be great if they did more to help out us minority shareholders.

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note the stock was at $12.40 when I started writing this post. Today someone bought 1000 shares at $15.50 which may be an all time high. Bid is back down at $12.40 now
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First the numbers.  The stock has been in the $12 - $13 range the past year.

And the split between Addmaster and Clary:

At the annual meeting I asked how much cash sits at Addmaster vs Clary and was told about half each.  They had one large bank printer order this year which is unlikely to be repeated so probably best to think of earnings being around a dollar.  

For the stock price of ~$12.50 ADDC shareholders have:
  • $14.25 cash
    • about $9.50 of cash at Addmaster plus $4.75 of cash at Clary. 
  • $26 BV
  • $1 EPS
  • 2.9% dividend
  • real estate probably worth $10
Annual Meeting:
The annual meeting was held on Dec 20.  In attendance were myself, two other outside shareholders, John and Hugh Clary (the brother co-presidents of Addmaster), Don Ash (3rd director of ADDC), and one other Clary family member.  

The formal portion of the meeting took only 5-10 minutes.  They passed out notes from last year, we voted our shares for the directors and auditor, and they tallied the votes.  Done.  Then we moved on to the informal portion which lasted a couple hours.  John and Hugh are very open and will talk about anything.  They gave us a tour through their little factory.

For Addmaster they talked about the same future products as last year.  The bank printer business is sort of stagnant and in slow decline so they are trying to expand.  One big benefit of an ADDC printer is color so they have to find the right market.  Their next version of printer is aimed at the medical field with the first application being syringe labels.  It will be ready for sale maybe midway through 2017 with a few prototypes already out for customer testing.  Right now a hospital must stock many different pre-colored labels then print in black ink onto the proper label.  With the ADDC printer the hospital could stock only a plain white label then print whatever colors are required.  Beyond syringes they will target pill bottles, name tags, and other medical type applications.  Once they get into a hospital they will try to address as many needs as possible.  Another product they talked about was components with one application being voting machines; ADDC supplies the printing mechanism.  They are also working on connectivity between the bank printers and the rest of the banking systems so wifi and bluetooth is offered.  

For Clary there wasn't much talk of new products.  They said Clary is the top of the line in the market for UPS's with about half the business being traffic and half being military.  Clary units are built for harsh conditions and carry a high price point.  

Buyback, Tender Offer, OTC Markets Stop Designation, Report Filing:
This was the most interesting part of the meeting.  Last year myself and another shareholder in attendance pushed management on our shareholder concerns.  Mainly what are they going to do with the cash and why won't they file reports publicly.  These are my main two gripes.  I think management does a fine job operationally but there's no reason to sit on cash greater than the market cap.  If they are going to have minority shareholders then they should file reports properly through OTC Markets (OTCM).  One of these years something will happen.

ADDC has a stop designation from OTC Markets.  This means there's a red stop sign up on otcmarkets.com and some brokerages will not allow you to buy their stock.  We explained this to management and asked that they pay the OTC Markets hostage fee of $5k to get off the stop designation list.  ADDC already distributes an audited annual report to shareholders so all they have to do is pay OTCM to submit a report through their official channel.  Management said they would consider it but I'd be surprised if they act.  In the past they've said they don't want competitors knowing their numbers because they think it'll hurt them in winning contracts somehow.  That's all fine if you're a private company but ADDC is not.  It was stressed they have a fiduciary duty to act in shareholders best interest.  We will see.

On the cash I asked what the plans are and they only would say they always consider what to do.  Same answer on why not pay a larger dividend.  I think they are just conservative and have had losses in the past so they are happy to keep a ton of cash laying around.  Last year I suggested they do a tender offer.  This year another shareholder suggested they do a buyback by just having a standing bid.  They were skeptical that they'd be able to get any shares like that but we said what do you have to lose.  We pushed and will have to leave it at that.  We explained they could do a formal tender offer or standing buyback or just buy out all minority shareholders.  

The most interesting thing was hearing the third director Don Ash.  He said he thinks they should do a tender offer because most of their shareholders have been holding for a very long time and it's time to do right by them.  He said he has been pushing this for years and it has resulted in more than one argument.  I couldn't believe my ears.  We have one third of the board pushing for a tender but unfortunately it's not the Clary's.  

Here's to hoping John and Hugh Clary listen to their board member Don Ash and initiate a tender offer.  Buy all minority shareholders out for a fair price.  


-- Dan
disclosure: long ADDC

4 comments:

  1. Thanks for the detailed writeup. Definitely agree it is highly undervalue and hope mgmt initiates a tender! What brokerage can you buy this on?

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    Replies
    1. I would love to see a tender and have pushed for it. But I'm not holding my breath.

      This one actually you can buy in more brokerages because it's not a penny stock. ADDC has a stop sign at otcmarkets but Fidelity will let you buy it. PennTrade will as well and T Rowe Price. I think TD Ameritrade will and others.

      You can check out more brokerage info at my other post:
      http://www.nonamestocks.com/2016/10/brokerage-firms-otc-markets-and-dark.html

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    2. On the tender I think it's the right thing to do. Or maybe one right thing they could do. And they are certainly thinking about it but the Clarys have not shown to be very proactive on the shareholder value side of things

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  2. I think another option they could do is to pull a Charlie Munger: invest the company's cash into solid publicly traded companies on the stock market. Maybe something like 50-75% of it. Why? Maybe they can't find any really good micro cap companies to buy out so it could be better to buy partial stakes in really good companies. It's such a waste of time to sit on this much cash having it do nothing. I understand having a cash buffer, but you don't ever need more than 20 some percent of your market cap in my opinion. That amount gives you a buffer during bad times but enough to deploy it in big amounts when good opportunities arise.

    Note: This is what I mean by the Munger story - he is the chairman for the Daily Journal Corp (a microcap stock) and also that Charlie Munger, of Berkshire Hathaway, and he used their cash to invest in publicly traded companies (ex: Bank of America) during the depths of the financial crisis. Since then, those investments have way outgrown the company's original market cap and the company was a good investment since then because of that. Pretty much solely because of how much the stock investments have grown.

    Obviously, you'd need someone who knows how to invest wisely. But in this case, it's ridiculous for this company to sit on this much cash. Either buy out minority shareholders, pay bigger dividends, buy out other companies, or buy shares in other publicly traded companies. What the heck is management doing/waiting for

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