Alliance One: A Few More Puffs In This Cigar Butt

Alliance One International (NYSE : AOI), a small-cap niche player that supplies tobacco leaves to cigarette manufacturers, has seen its shares languish behind the broad market for the past few years. While operating as a middle man between tobacco producers and cigarette manufacturers is certainly not the most exciting business to be in, the company is profitable; and likely to remain so if it can manage its debt load. With the market making fresh new highs and the S&P 500 Index now trading  for over 16 times earnings, it might be time for Foolish investors to back up the truck and take a closer look at this small tobacco supplier.

Deep value stock
Alliance One's current troubles started in 2006, when the company recorded a massive $256 million impairment charge. Despite the large impairment, and the company operating in an unpopular industry, the stock has a-lot to offer value-minded investors as the company boasts $3.44 of cash per share while trading at $2.90

On top of the company's healthy liquidity position, it has approximately $4.00 of tangible book value per share. This means that all the company's hard assets, i.e. no goodwill or intangibles, minus all liabilities, amounts to $4.00 per share. This covers the market cap by more than $1.00 per share and provides investors a healthy margin of safety. 

Source: Corporate SEC Filings

Why so cheap? 
At fair market prices the company could sell its assets and provide a nice return to shareholders, so why is there such a discount? The market apparently believes Alliance One International will continue to take losses as a going concern. As explained earlier, the company's top-line is not the problem.

In the past two quarters, its gross margins have been approximately 12% and 13% respectively. Since 2008, net income and EPS have been:

Source: Corporate SEC Filings

As the chart above shows, the company has not had terrible earnings since 2008. This fiscal year has not been so hot, primarily because they are paying off debt. The company has another $55 million debt repayment coming up, so its likely next quarter and yearly fiscal earnings will be negative. Paying off debt may hurt short term earnings, but will have a positive effect on future earnings as interest expense is the 3rd highest expense on the companies' income statement following cost of goods sold and SG&A expenses. 

Capturing value for shareholders
For shareholders to capture the value implied in the shares, there are two scenarios to look for:

1. Pay off debt and continue as a going concern: This is what they are currently doing. It would be good to analyze the yearly and quarterly filings to comprehend how well they are achieving this. 

2. Liquidate at non fire-sale prices: A majority of the company's assets are in inventory. If the company decides to liquidate, it would be preferable to do so in a non-bankruptcy event where the assets have to be sold quickly. This forces the assets to be sold at lower-than-fair value prices.

Competitors
The fact that Alliance One trades at a discount to it's assets leads one to wonder if its main public competitor, Universal Corporation (UVV 1.86%) is valued at a large discount? Interestingly enough, Universal's market price of approximately $55 dollars per share gives it a much higher valuation than Alliance One by every measure. Universal's cash per share only covers about $8, and tangible book value is slightly below market price. The difference in valuation between Universal and Alliance One is significant since Alliance One trades at a 25% discount to tangible book value while Universal trades at a slight premium.

Source: Corporate SEC Filings

Foolish conclusion
Alliance One International is far from a favorite growth stock. Its earnings are volatile, and it has a lot of debt. With that said, it trades for a discount to tangible book value and has managed its debt load effectively so far. If the company can digest its debt properly, it looks as if this cigar butt still has a few puffs left.

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