One of the risks of investing in quality small companies is that they may be taken private or bought out by someone bigger.
How's that a risk? Allow me to explain. As Foolish long-term investors, we hope to hold on to these firms for big gains over years or decades, rather than the quick bump the market provides on word of a buyout.
That's the context for this examination of the news from one of today's big market movers, Books-A-Million
This morning, the company announced plans to purchase up to 24.6% of outstanding shares through a Dutch auction tender offer that would price shares between $8.75 and $10 each. That's a share buyback of up to $40 million, to be financed through the firm's revolving-credit facility.
It's worth noting that key insiders and other major holders -- who own a very large stake in the company -- aren't selling their shares. There's only one reason a company makes a move like this: It expects that returns on the expended capital will exceed what it's paying. (Well, there's another reason, but it involves shady doin's, and I don't think that's the case here.)
Because this company, one of the biggest book retailers in the U.S. after the likes of Motley Fool Stock Advisor pick Amazon
I'd have to agree. When Tom first discussed the firm, he pointed out that one of its problems was inventory. Books-A-Million turns inventory more slowly than the competition does, but it's been improving in that regard. At the same time, margins have grown steadily over the past few years.
While I see discounters like Wal-Mart
Returns on assets, equity, and capital are still nothing to celebrate, but again, they're trending toward the better. An interesting look at the company from an employee's point of view (free Fool Community trial required) seems to confirm what the numbers hint -- that the ball is rolling and the best is yet to come.
In short, we may have one of those situations that makes savvy investors salivate: A profitable small company makes the right moves and still lacks the Street's appreciation. My take is that Books-A-Million is undervalued at $10 a share. Shareholders ought to collect that nice dividend, wait for the results to come in, and wait for the market to offer them a better, future reward.
For related Foolishness:
- Books-A-Million has a lot in common with Lynch's 10-baggers.
- Consider leaving Borders on the shelf.
- Check in with BAM's Q4 results.
Seth Jayson grabs most of his reading material at the public library. At the time of publication, he had positions in no company mentioned. View his stock holdings and Fool profile here. Fool rules are here.