TM editors' note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence. This stock has a market cap of less than $14 million.
For those investors who are unfamiliar with Avalon Holdings Inc (AWX), I will refer you to an article I wrote in March about this undervalued low float stock: Avalon Holdings Inc - A Low Float Stock .
AWX just released their earnings for Q1 and as I expected, they were good! The company reported earnings of .18 a share vs a loss of (.21) a share in Q1 of 2020. Q1 is historically a very weak quarter for AWX as the winter weather in Ohio has a negative impact on both revenues and earnings. The fact that AWX reported a profitable Q1 bodes very well for the rest of the year. There were 2 primary factors behind the dramatically improved earnings report. First and foremost was the improved hotel and golf operations that was profitable in Q1 of 2021 compared to operating losses in Q1 of 2020.
The main driver behind the improved performance in this sector was the completion of the 30 million dollar renovations to the Grand Resort Hotel which enabled the company to raise both room rates and menu prices increasing both revenues and profitability. The other factor that helped improve earnings was the PPP loan forgiveness as the company showed a 1.1 million dollar gain from the extinguishment of debt related to this loan forgiveness. The good news as reported in the recent 10Q filing is that the company still has 900K that will be forgiven and give a boost to the Q2 earnings report!!!
Q2 & Q3 are historically profitable reporting quarters for AWX although Q2 of 2020 was a very weak quarter as the company reported a loss of (.11) a share on revenues of only $13 million as COVID-19 related government restrictions negatively impacted both revenues and earnings last year. This will make the earnings comparisons for Q2 fairly easy and AWX should show dramatically better earnings than even the Q1 comparisons which were good!
The three primary reasons why I expect an even better earnings comparison is #1 that Ohio recently announced they will end all COVID-19 related health restrictions on June 2nd of this year which will allow the company to operate normally which should positively impact revenues moving forward. #2 as discussed above the new renovations at the Grand Resort have allowed the company to raise both room rates and menu prices and will offer improved revenues and earnings comparisons to Q2 of 2020. Lastly, the PPP loan forgiveness will boost 2021 Q2 by .23 a share.
Avalon will report its Q2 earnings sometime in early August and my conservative expectations for this next earnings report is an earnings range of .35 to .50 a share on revenues of $16-18 million which will be a dramatic improvement over Q2 2020. That will set the stage for the company to be heading into their historically best quarter Q3 with a solidly profitable first half. My expectations for full-year earnings to be in a range of $.75 to $1.00 per share on revenues of $60-65 million which is a dramatic improvement from not only full year 2020 earnings but even compared to previous years.
The company also disclosed they created a new company devoted to building a medical spa business. This may impact future revenues and profitability in the future.
Here is an excerpt from the disclosure in the recent 10Q:
Avalon Med Spa, LLC
In March 2021, Avalon created a new Ohio limited liability company, Avalon Med Spa, LLC. Avalon Med Spa, LLC will provide elective appearance improving nonsurgical aesthetic services under the supervision of a licensed physician. Avalon Med Spa, LLC, offers investment opportunities to accredited investors by selling membership units through private placement offerings. The monies received from these offerings, along with internally contributed capital, will be used to purchase medical spa equipment and construct the facilities necessary for operation. Avalon will manage all decisions regarding the medical spa operations for a percentage of the gross revenues.
In March 2021, Avalon made a capital contribution of approximately $0.5 million, which included cash and certain equipment, in exchange for membership units of Avalon Med Spa, LLC. On March 31, 2021, Avalon owns 100% of Avalon Med Spa, LLC. Avalon Med Spa, LLC was not in operation on March 31, 2021. The operating results will be included in Avalon’s golf and related operations segment.
They also will be pursuing a court case against the Ohio Department of Land and Natural resources related to the suspension of their wastewater injection wells. According to their recent 10Q filing, that case is scheduled to begin in September of this year.
On March 18, 2019, Avalon received notice that the 11th Appellate District Court in Trumbull County, Ohio issued a summary judgment in favor of the Ohio Department of Natural Resources in the writ of mandamus action that resulted from the suspension order of the Company’s saltwater injection well. The decision was appealed to the Supreme Court of Ohio on April 5, 2019. Oral arguments in the case occurred on April 7, 2020. On September 23, 2020, the Supreme Court of Ohio ruled in favor of the Company. The Supreme Court of Ohio reversed the decision of the 11th Appellate District Court and remanded the case back to that court for a trial on the merits. The Company is currently preparing for a trial which is scheduled to occur in September and October 2021. This case if they prevail could net the company $5 million+
They are also awaiting final judgment on their court case against Guy Gentile which if they win will net the company $4 million+.
Considering the positive earnings momentum of this company and the potential future earnings catalyst from a legal victory combined with the real growth of their hotel and golf operations the current valuation of AWX stock price seems extremely undervalued.
With a current market cap of only 16 million and a 2021 expected PE of less than 8... It is my opinion AWX is not going to stay this cheap for long.
Comments
Log in or sign up to join the conversation.