It should be noted that because this update is occurring “off cycle”, we will not be delving into the typical analysis of the balance sheet, income statement, or cash flow statement. This article deals specifically with the Armada press release of January 20th, 2021. Armada should be issuing Q2 financials later this week or in early February, so we will engage in a more fulsome analysis of results at that time. For those that are interested, our initial review of Armada can be found here.

On January 20th, 2021, Armada (ARD.TSXV) issued a press release, in which the company announced that Armada had just released an e-book, aptly entitled “The Road to the Deal”. The intent of the book, as per the press release is to “….take away the fear and anxiety associated with buying a new car or truck. Along the way, we (Armada) discovered that removing the ‘mystery’ from the process benefits both buyers AND sellers, in that more vehicles are sold and long-term relationships are established.”

When I read this press release, I initially thought this was just another self-congratulatory press release that is typical in the small cap market. As I have mentioned in other articles, press releases are sometimes used in lieu of “real results”, and much of the time, they simply stoke investor imagination – and share price. But later that same day, I thought about it a bit more, and decided I was wrong. The share price was actually lower (after the press release) than it was earlier this month, and the more I thought about it, the more I came to the conclusion that this press release is worth talking about. Bear with me as I walk through the reasons why….

Armada is actually engaged with their shareholders. In one of our recent posts, I highlighted one of the reasons why I continue to invest in the volatile small and microcap sector. In “10 reasons why I bother…”, number 3 on the list was the fact that small and microcap CEOs will actually return your calls and emails. Keep in mind, not every company is the same, and some smaller companies could care less, but generally speaking, they are more likely to do so. When I read the Armada press release, it raised some questions – so I asked. The fact that I got a response wasn’t what was interesting, it was the speed at which it occurred. I received a full response to all my questions in less than 24 hours, and a clear indication that if there were more questions, the door was open. A willingness to clearly (and quickly) share information with shareholders in an “unfiltered” channel like a direct call or an email is a big deal. It is much easier for a company to issue a press release (or a promotional shareholder piece) and never take direct questions – it is much harder to be there at the behest of a shareholder and answer questions quickly and directly.

Armada is already in business – they aren’t talking about “having one”. This might sound painfully obvious, but it is relevant. So many of the press releases that come from small cap companies talk about the future – what they plan to do, and how much money they will make, if everything goes as planned. Or, even more breathlessly, the fact that the company has signed a non-binding expression of interest about one of the products that is in development. You may notice that paragraph has a lot of italics in it, because we are trying to highlight the ethereal quality of these statements. I think that last one is my favorite, as a non-binding expression of interest is analogous to someone looking at your car parked outside. When you go and talk to him or her, they say “Hey, I like your car, and I’d like to sign a document that says that maybe I’d like to buy your car – but just maybe”. If that happened, you might tell your neighbor, but you certainly wouldn’t get too excited. So, what we are trying to highlight here is the fact that Armada is talking about their core business, which is already generating real revenue and real cash flow. This press release is talking about something “real”, and is not contingent on a slew of variables turning out “just right”.

Armada has created a new, low cost revenue stream out of thin air. There have always been print books on this topic, and there are many websites which address new car buying, so Armada hasn’t exactly created something brand new. That being said, the point is not to dominate e-book sales in this category, but to inject oneself into that space. Tim Hortons sells coffee, Starbucks sells coffee, and Second Cup sells coffee – they all sell the same thing. However, all of these companies also realized that some people want a latte or small espresso. Armada was already in the “regular coffee” business with their CarCostCanada member service – but some people didn’t want a “regular coffee” for the price of the membership. With the e-book, they are also selling their version of an “espresso”, an area in which previously they were getting zero revenue from.

People will always find the purchase of a new car stressful. Next to buying a house, buying a new car is perhaps the 2nd most expensive purchase a person can make. For most people, this is stressful, which is validated by 3rd party articles that say the same. The e-book addresses this, and will make it more probable that someone will take the “new car plunge”. You have to remember, Armada doesn’t care who you buy the car from, they are simply interested in the fact that you want to buy a new car. This is similar to the “picks and shovels concept” that was so prevalent in gold rush towns. The miners were all looking for the motherlode, but the shopkeepers were in the middle, selling the supplies to help the miners in their quest. Consumers are looking for the “best deal”, and Armada is like those shopkeepers, extracting a slice of value in the process.

A small amount of e-book sales is material. So, you are probably agreeing that the purchase of a new car is stressful, but not everyone is going to run out to buy this book – and I totally agree. But here’s the rub – not everybody has to buy the book. According to StatsCan, about 1.44 MM new cars were purchased in Canada last year – and that was a slow year, due to COVID. Let us assume that a very small fraction of people, just 1%, decide that an e-book would help them in their purchase of a new vehicle. Additionally, let’s assume that 30% of the $29.95 cost of the book is lost to the online channel, such as Amazon or Apple books. The simple math says this:

1,440,000 new car purchases x 1% x $29.95 book price x 70% = $301,896

That last number looks small, but the thing is, Armada is a small company, with a small number of shares outstanding (17.67 MM), which also hasn’t diluted the shareholder base to death. This means that this “small” $301,896 equates to incremental EBITDA of $0.017/share – not bad, given that 99% of the potential buyers have passed on the book in this example. In addition to this, Armada (as per their most recent audited statements) has significant tax pools that remain unutilized, which could be used to reduce taxes in the future. This means that any additional earnings could be sheltered from tax, and if one were to apply a “market average” 10x multiple, this incremental $0.017/share could be worth $0.17 in isolation. The moral here – small companies with a small numbers of shares outstanding don’t need enormous earnings bumps to make a difference in the share price.

Most importantly, the book creates awareness – and probably new customers. Not only will the e-book create another revenue stream, but it’s going to drive incremental business for Armada. When you think about it, there are currently two classes of people out there when it comes to new car purchases – the relatively small population that is already using the Armada product offerings, and the very large population that is not. For that group that is already dealing with Armada, it will simply provide them with another possible product offering. For that other, very large population, it creates a pathway to potentially engage Armada when they decide to buy a new car, when previously, they might not even have known about Armada, CarCostCanada, or the other Armada product offerings.

Even prior to the e-book, Armada looked attractive. Readers of our initial Armada article will recall that we suggested the valuation was very attractive at that time (early December 2020), and even at the higher price of $0.175/share, the valuation continues to be attractive. In our “Recognizing small cap opportunities” article, we indicated that small cap companies can provide cues well in advance, before the price runs away. In our original Armada article, we suggested that Armada was undervalued even if it executed at “underwhelming” levels for the next three quarters. Given that Armada has just created a brand new revenue stream, we would suggest the following for consideration: In their fiscal Q1, Armada created $0.0135/share of EBITDA and $0.0128/share of earnings. It stands to reason that with a new revenue stream, the probability that Armada continues to meet (or possibly exceed) this level increases. If Armada were simply to perform at the same level, with no uptick from the sale of the e-book or related business lines, this would suggest full year EBITDA and EPS of $0.054 and $0.0512 respectively. These results in turn imply a current valuation (today) of:

• A PE multiple of 3.4
• An EV/EBITDA multiple of 2.72, which is reflective of Armada’s high cash balance.
• An operating cash flow yield of 29%, if one uses EBITDA as a proxy for operating cash flow.

All of these valuation parameters, in conjunction with the fact that the float is small, and the company has no debt, skew Armada into the realm of “very interesting”. If the e-book increases revenues beyond these levels, then the upside is much greater – which is why I continue to hold Armada, and purchase at opportunistic prices.

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