Automodular Corp. has a pile of cash, a profitable business, and a luscious dividend. And yet, it is arguably the cheapest stock on the entire Toronto Stock Exchange. It's priced as if it's going out of business and liquidating itself.
Which, actually, it just might do at the end of this year.
Automodular is a contract manufacturer for the auto industry, assembling complicating modules such as instrument panels or radiator supports. The company, which traces its history back to 1957, served General Motors until GM ended its contract in 2010, prompting Automodular to close its plant in Oshawa, Ont., and lay off 100 workers. It now has just one customer, Ford Motor Co., which plans to pull its work in-house and end its Automodular deal on Dec. 23. The jobs of 525 workers in Oakville, Ont., are at stake.
Automodular is seeking new work – it made a foray into making wind turbines in 2012 – but it has no news of any potential 2015 revenue. Chief executive officer Christopher Nutt told shareholders in his annual letter this spring that while Automodular is "convinced that our lean manufacturing and project management skills can be transferred over to several other market segments," and the company "will consider all options available to us, including potentially winding down the company."
This explains some truly unusual valuation numbers. At its most recent financial report, Automodular reported no debt and $39.8-million in cash. Its market capitalization, as of Friday, was $43.8-million.
This is an enterprise value of just $4-million – compared with $82.4-million in sales, $9.9-million in net income and $22.8-million in EBITDA, or earnings before interest, taxes, depreciation and amortization, over the past 12 months. (Figures from Standard & Poor's Capital IQ.) This gives Automodular some of the lowest pricing ratios on the entire TSX.
In reality, though, Automodular is priced almost perfectly for liquidation. Its shares, at $2.26, trade a few pennies below their tangible book value, which is a measure of the company's assets, minus its liabilities.
What's the play for investors, then? Consider this: The company is on schedule to pay two more quarterly dividends this year of six cents apiece. (It's an annualized yield of more than 10 per cent.) Automodular has been generating roughly $5-million in cash a quarter, paying out just over $1-million of that as the dividend. Add three-quarters of that net cash to the March 31 numbers, and my rough calculations suggest Automodular should have about $2.60 in net assets a share at year's end, five months away. Combine that with the dividend, and there's a possible 20-per-cent gain at current prices.
That's the liquidation scenario. There's always a chance, however small, that Automodular lands a profitable deal to make more wind turbines (the company said earlier this year it was in discussions with two separate manufacturers). With the shares priced at a slight discount to book value, the downside seems small, the wind-up could be profitable and a purchase of the shares includes an option on a possible future business at Automodular.
Here are some of the downsides to consider: The company may not have adequately estimated its shutdown costs, meaning there would be less cash on hand, and a smaller asset value, at year's end. The announcement of a new contract might actually scare off investors who bought in last year right after the Ford announcement and who have already profited handsomely. And, given how few pennies make up the potential gains here, transaction costs could eat up most of a small investor's potential profits.
All that being said, the rock-bottom pricing of Automodular shares offers an intriguing opportunity. The potential end of a long-time Ontario manufacturer – and the elimination of its workers' jobs – would be a sad denouement. There seems to be little downside, however, to investors taking a flyer on whatever future Automodular can eke out.