In my last update, I generated a list of the cheapest publicly quoted companies in the United States. I noticed that one of the companies that popped up on my list was a Sardar Biglari pick from his days at Western Sizzlin’. Given the reputation of Biglari, Precision Auto Care is worthy of further study.
Precision Auto Care is a network of franchised and company-owned auto repair and tuning shops. The company has over 380 service facilities in 8 different countries including China and the Middle East. Recently, Precision Auto Care recently “went dark” and stopped filing with the SEC in order to reduce the costs in complying with Sarbanes-Oxley. With the majority of stock held by company management, the lack of free floating stock and virtually no analyst coverage, Precision Auto Care has almost entirely disappeared off the investment radar.
Financial information for Precision Auto Care.
Historical share price of Precision Auto Care.
As you can clearly see, the market has rewarded the improving balance sheet, revenue and earnings of Precision Auto Care by cutting the company’s share price by over 80%. The price now suggests that the company not only is there no chance of growth, but also that there probably isn’t a future for Precision. Given the recession, large cash position, reasonable business prospects and solid revenue; it does seem that there is a degree of overreaction in the share price movement.
Selected financial data.
- Market cap: $4,930,000
- Current price: $0.17
- Cash: $3,825,000
- Long-term debt: $0
- Book value: $9,800,000
- Price to book value: 0.5
- Trailing P/E: 27
It’s easy to see from financial statements why Biglari was drawn to Precision Auto Care. Like Western’ Sizzlin’, ITEX and Stake n’ Shake; the company is run as a franchise, working in an growth area, dealing with a service that’s easy to understand and is unlikely to go away. However, like Stake n’ Shake, there are areas of the business that are a cause for concern. Firstly, with the onset of the recession, management have begun to purchase franchised operations, running them as company-owned stores. With 11 stores now being run by the company, it’s clear even at this stage that the return on investment is not high (you can also see that gross margins are being reduced by this strategy), and may even be negative (from 2008 to present, the company appears to have made a slight loss on company-owned stores. While company-owned stores are likely to become profit generating as the economy continues to improve, it’s seems unlikely that shareholders will see a decent return of their investment anytime soon. Despite this negative, Precision Auto Care is priced at such a discount to intrinsic value, it’s worth a place in any value investors portfolio.
Catalysts for a higher share price.
- Earnings/balance sheet to continue improvement as recession ends (likely).
- Emerging markets to perform (likely).
- Share buy-back/dividend (possible).
- Management to stop purchasing franchised locations and focus on growing the franchise (first part may be unlikely).
I believe the Precision Auto Care offers deep value with the possibility of significant upside due to global diversification, business model and/or improving business conditions.
Tags: net net, paci, precision auto care, sardar biglari, stock, value
Steak and Shake is a $500m company, there’s no way they would be interested in taking over a company that’s 1/100th its size. You are right about how cheap Precision autocare is. It’s surely worth at least $0.30 a share dead.
Good blog, even though you’ve spelled Steak wrong
You’re absolutely correct, Precision is small fry and too small for Biglari to be worrying about.. However, it is still profitable, at a significant discount to assets and in a non-buggy whip industry. If continued earnings don’t shift the price, I imagine management could take advantage by using the large cash balance.
seems like this one could fall into the value trap category, since the top holders have something like 84% of the stock, leaving minority holders with little clout to agitate for better capital decisions.
Out of curiousity, how’d you come across this? I’m on the troll for small companies just like this, only without the controlling shareholder issues and would love to know how this one came across your radar.
Thanks for the reply pdunfy.
A value trap is only really a worry when you invest in a company that is operationally poor, has incompetent or self-serving management. The company is in decent shape, management appear to be aligned towards shareholder interests, although I can’t say I’m thrilled about the acquisition of franchised locations. Even excluding the growth (which looks a real possibility), the company is trading at a huge discount to book value, so you’re essentially getting a cheap company with the growth for free.
To answer your second question; I first noticed Precision Auto Care when it was disclosed as an investment by Western Sizzlin’, in the filing that was released as part of their merger with Steak N’ Shake. When it popped up on my cheap stock filter, I was sufficiently intrigued to give examine it further.