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.