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AT Cross (ATX): Value or Not?

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By Pilgreen12
January 18, 2006

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Is AT Cross (ATX) selling for less than the value of its assets? When I read a recent post by KahunaCFA I was surprised to learn that this manufacturer and distributor of fine writing instruments had a market value of only 65 million dollars.

I have received several of their " classic century" pens and pencils over the years and keep several at my desk. One of my great finds as a young child was a dented and scratched chrome "classic century" pen on the floor of an auction house. That very pen, with its dent and scratches, writes as smooth as the day I found it being kicked around and disrespected on that auction house floor.

Could it be that ATX, like that chrome pen, is being kicked around and disrespected with a market cap of only 65 million dollars? Is there value at ATX? I love their pens, but should I love their stock? Or is ATX headed for bankruptcy?

Recent profits have been nearly nonexistent at ATX, but ATX is not close to knocking on the bankruptcy court's door. Its debt to equity ratio is less than 20% and its current ratio is about 2.5. I believe ATX might present an excellent opportunity for a turnaround or a more likely a private equity buyout. Why you ask? It appears to be selling for less than its adjusted net asset value.

I downloaded ATX's most recent balance sheet from their October 1, 2005 10-Q and made a rough-cut valuation of their assets (in millions) excluding Property, Plant & Equipment and Goodwill/Intangibles as follows:

Cash and Short Term Investments (100%)     10.1
Accounts Receivable (90%)                  19.8
Finished Inventory (75%)                  7.9
Work in Progress (50%)                      2.6
Raw Materials (40%)                        1.8
Deferred Income Taxes (100%)                9.0
Other Current Assets (25%)                  3.0
                        Total Assets      53.6

I made certain adjustments (i.e., multiplied A/R by 90%) to assets that I believe may have a reduced realizable value in liquidation. I excluded property, plant and equipment and goodwill/intangibles because I think those assets require specific consideration in ATX's case as discussed below.

No adjustments were made to ATX's debt. My rough-cut valuation of ATX's debts (in millions) is as follows:

Line of Credit                           5.0
Long-Term Debt                           5.9
Accounts Payable                        15.3
Accrued Comp & Taxes                     3.8
Retirement Obligations                   8.9
Restructuring Liability                  0.3
Accrued Warranty Costs                   1.6
                              TOTAL     40.8

It is important to note that ATX has very little debt. The book value of its property, plant and equipment (P,P&E) is 130.825 million and this is its largest asset. Most of ATX's P,P&E is probably attributable to manufacturing equipment which would have substantially reduced value if it were liquidated. However, ATX owns a 269,000 square foot manufacturing, warehouse, and office facility in Lincoln, Rhode Island that is included in its P,P&E.

I tried to located the tax assessment of the real estate on line so that I could use the assessment as a conservative value; however, I could not locate it. Therefore, I extrapolated a value for this asset by assuming a $7.50 per square foot rental rate, which gave me an annual rental value of $2,017,500. I applied a 10x multiplier to the rental value to estimate the fair market value of the real property and improvements at 20.2 million dollars. I think this is conservative and this asset may be worth substantially more.

I valued the remaining P,P,&E of 110.625 million by using 20% of its book value. I anticipate that much of this is specialized manufacturing equipment and cannot be easily sold. This is an arbitrary number, but I believe it is also very conservative. If I error, I want it to add to my margin of safety and not reduce it. With these assumptions, the liquidation value of the remaining P,P&E is 22.1 million dollars.

Therefore my total value of P,P&E is 42.3 million, which when added to the other adjusted assets value results in a total value of 95.9 million. The adjusted net assets are then reduced by the total liabilities of 40.8, which results in a net asset value of 55.1 million dollars.

Of course the current market cap of ATX is 65 million and therefore we are still short by about 10 million dollars from ATX's net assets being equal to or greater than its market cap, but we must still consider the value of goodwill and intangibles. Normally, I would disregard all goodwill and intangibles, however like Coca-Cola, ATX, has a valuable brand name and trademark that are recognized around the world, and these have real value. As for patents, I don't know what, if any, pen and pencil technology is patented by ATX, and therefore I ignored patents for purposes of my rough-cut valuation.

The value of the "Cross" name and trademark are difficult to determine, but I think they would be worth somewhere between 25 to 100 million dollars. When this is included into the net asset value calculation, ATX's liquidation value is approximately 15 to 90 million dollars more than its present market cap.

At first it appears that there is little downside in ATX. Unfortunately ATX has been hard pressed to maintain its profitability. ATX has lost 27 million dollars since 1998, but it has been profitable during three of its last four years. It has lost nearly 2 million dollars for the nine months ended October 1, 2005. If ATX can stem these loses, its share price should rise. However, even if ATX can not do this, it seems like an ideal private equity or takeover target. ATX has recently expanded its branded into eyewear with the Costa Del Mar brand. It has also extended its Cross brand into portfolios and other writing accessories.

The most important aspect of my analysis hinges on the valuation of the P,P&E and the brand. I think I am being conservative, and although ATX is not a Grahamian "Net Net", it does seem to be selling for less than its net liquidation value. One board member (Galal Doss) owns approximately 26% of the outstanding stock and the CEO (David Whalen) purchased 100 shares during November and December 2005 for approximately $4 per share. I doubt they have any desire to see this value evaporate. Given its small market cap and the cost of complying with SOX, it seems that it would be prudent for ATX to go private or be bought out, either of which should be done at a premium to its liquidation value.

Many years ago that chrome "classic century" pen being kicked around on the auction house floor was a great find. Today I ask, is ATX a great find being kicked around on the AMEX floor?

As always, the thoughts of others are welcome.


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