An Unlisted Eccentric – ACMAT Corp. ACMT/ACMTA

One of the reasons I so enjoy the unlisted markets is the opportunity to discover and examine some truly odd and unconventional stocks. Where else in the public markets can one invest in a massive and secretive agricultural empire (J.G. Boswell Co. BWEL), a minor league baseball team (Rochester Community Baseball Inc. RCCB)  or even extensive real estate, timber, energy and mineral assets in Michigan or Tennessee (Keweenaw Land Association, Ltd. KEWL and Coal Creek Company CCRK)? It’s tough to get bored.

ACMAT Corporation qualifies as one of these eccentric companies. ACMAT is a national provider of surety bonds for the construction industry. Surety bonds are purchased by builders and contractors by necessity. These bonds are sold by insurers, who agree to pay damages in the event that a contractor fails to complete a contract to the agreed specifications or otherwise fails to perform. After all, nobody wants to award a contract to a construction firm without having recourse should that construction firm go bankrupt with the building halfway complete. Which is why things like the CSCS Mock Tests by Construction Skills Test exists, which everyone involved, in the end is glad for. ACMAT specializes in providing bonding for non-standard contractors who otherwise would have difficulty securing coverage from conventional surety bond underwriters. That may sound risky, but the truth is that ACMAT is an exceptionally conservative underwriter. In 2012, ACMAT’s loss ratio on premiums was only 10%, and 11% in 2011. That kind of underwriting would be a recipe for amazing profits, but the company uses only a scant percentage of its total underwriting capacity. In the 2012 annual report, the company noted that it could increase premiums more than 20 fold before breaching NAIC guidelines. Due to its conservatism and history of profitable underwriting, A.M. Best rates the company at “A” or excellent.

ACMAT is an insurer that scarcely bothers to insure. In fact, premiums written have declined 85% from a high of $15.7 million in 2004. The company expresses a willingness to increase its activity once the construction market picks up, but it is unlikely that any increase will approach previous levels of underwriting activity. ACMAT’s current asset base is 47% lower than it was in 2004, and its equity is 25% lower.

As conservative and limited in scope as ACMAT’s insurance operations are, the company could hardly be more aggressive when it comes to returning capital to shareholders. ACMAT is a voracious purchaser of its own shares. ACMAT’s formal share repurchase operation was begun in the 1980s, and the company has had a laser focus on reducing its share count ever since. Since 1994, the company has reduced its shares outstanding by a whopping 73%, hoovering up an average of 6.7% of shares outstanding each year. Since 2009, the pace has accelerated to 8.3% per year. A yearly chart of shares outstanding and book value per share is presented below.


From 1994 to the present, ACMAT spent a little more than $77 million on net share repurchases, a figure that is more than four times the company’s current market cap. The repurchases were done at an average price-to-book ratio of 1.05.

At this point, I’d love to talk about how ACMAT’s share repurchases were some Templetonesque example of superior capital allocation policy and how shareholders have enjoyed high teens level returns for decades on end. Unfortunately, I can’t, because ACMAT’s returns have been awful, and that’s putting it gently. Since the end of 1994, shareholders have seen their investment in ACMAT’s class A stock rise by…..151%. Over the same period, the S&P 500 (in terms of SPY) returned 481%. Even the Barclays Aggregate Bond Index returned around 221%. There’s no excusing such a poor long-term performance. ACMAT’s return on equity has consistently failed to match its cost, costing shareholders millions.

It goes to show that for as much as value investors love to trumpet the benefits of share repurchases, they aren’t magical. Satisfactory long-term returns require a comprehensibly sensible capital allocation policy that strives to earn an acceptable return on equity. ACMAT shareholders would have been much better off if the company simply liquidated in 1994, rather than spending the next two decades earning anemic returns on equity. Even today a liquidation would be very beneficial. Company shares trade at a large discount to book value and the company seems unlikely to earn an attractive return on equity any time soon.

But of course, that will never happen due to ACMAT’s thoroughly entrenched insiders. CEO Henry W. Nozko and his wife Victoria C. Nozko together own a majority of shares outstanding and control nearly all of the voting power. The last available compensation data for Mr. Nozko is from 2003, where he earned a salary and bonus of $732,000. This may not seem like much, but it equaled fully 29% of ACMAT’s pre-tax income for the year. The company’s top three officers earned an amount equal to 62.5% of ACMAT’s pre-tax income for the year. This data is old, but I see little reason why anything would have changed in the last decade, especially now that the Nozkos control even more of the company’s shares through the continued repurchases. Company management also seems prone to vanity projects, including the construction of a brand new headquarters at a cost of $4.3 million in 2012.

That brings me to the second point of this post: management matters. And it matters especially with insider-controlled micro-cap companies, where the major institutions and activists that keep large company management teams nominally in check are absent. Management teams at large companies can and frequently do make bad capital allocation decisions, overpay themselves and pursue vanity projects. But if they do it for long enough, they are typically challenged and either chastened or removed altogether. There is rarely such a check on the tiny and obscure companies that populate the world I play in, and that makes management evaluation all the more important. Some like to talk to management directly and ask questions about strategy, assess ethics, etc. That works for them, but I reason that shoddy or dishonest managers are pros at knowing what investors want to hear and saying exactly that. I’d rather look at what they do. Managers prove themselves to me by aligning their interests with shareholders, then showcasing their skill and trustworthiness by creating track records of efficient operations, astute capital allocation decisions and reasonable compensation.

Perhaps if ACMAT’s management team gets serious about improving returns on equity and equally serious about reducing its cost structure, ACMAT will be an attractive investment. But for now, it’s just another unlisted oddity.

Alluvial Capital Managment, LLC does not hold shares of ACMAT, Inc. for client accounts. is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at

ELXSI Corp.’s Outlook is Bright, But Who Will Benefit? – ELXS

ELXSI Corp. has been on my radar screen for years. The company’s primary subsidiary is a fast-growing, very profitable business in an industry with a great demand outlook. The company’s less-profitable subsidiary is winding down and becomes less and less relevant as time goes by. Gross margins, operating margins and returns on capital are all reaching new heights, and the company has built a solid cash buffer. With all those positive dynamics in place, just what is it that has kept me out of ELXSI? The answer is one word, the same word that keeps me out of many otherwise attractive small companies: management. ELXSI’s history is riddled with exploitative related-party transactions that have resulted in a massive value transfer from ELXSI’s minority shareholders to company insiders. More on that in a bit. For now, let’s examine ELXSI’s corporate history.

A decade ago, ELXSI was a struggling restaurant operator with minor manufacturing operations in Florida and a retail store installation business in Illinois. The company had purchased 30 Bickford’s and Howard Johnson’s restaurants from Marriott Family Restaurants, Inc. in 1991, but changing trends in the restaurant industry and ballooning costs caused the company’s operating income to erode, turning negative in 2004. Realizing that most of its restaurants were beyond rehabilitation, the company spent the next several years shutting down or selling off properties. In 2007, the company shut down its retail installation business after losing a significant client.

Today, ELSXI operates only six restaurants in Massachusetts and New Hampshire, and leases three restaurants to third parties. Restaurant revenues accounted for 62.9% of total turnover in 2004, but only 11.1% in 2013. While the restaurant segment is a shadow of its former size and importance, the company’s manufacturing operation has become a force. Cues Inc. is the name of the business, and its success has completely changed the picture for ELXSI. Cues manufactures robots and systems for use in inspecting pipelines, especially sewer lines, water lines and industrial process lines. Cues has grown its top line at 5.9% annually for the past decade, and now accounts for the great majority of ELXSI’s revenues, earnings and assets.

The outlook for Cues’ products is bright. American water and sewer infrastructure has suffered under-investment for generations and is approaching a critical state. Water mains one hundred years or older are still in use in many areas, and some cities still rely on pipes made of obsolete materials, even wood . (In all fairness, it seems that wooden pipes actually have quite a long useful life, though they require quite a lot of expertise to repair.) In my view, products that enable inspectors, engineers and others to evaluate existing infrastructure will be more necessary than ever in coming decades. Of all the various types of infrastructure, water delivery and treatment systems are among the most critical and most need of investment, and Cues will benefit from that trend.

Cues’ success and the winding down of the unprofitable restaurant segment has allowed ELXSI to more than double its EBIT since 2007, even as sales fell 10.7%. Never underestimate the power of expanding margins! Indeed, ELXSI posted an EBIT margin of 7.7% in 2013, a great improvement over the 1.2% EBIT margin “achieved” in 2007. Here’s a look at ELXSI’s results for the last decade.



As ELXSI’s profits have risen, so has its efficiency. The company now generates a respectable NOPAT/Average Invested Capital ratio of over 15%, compared to a the single digit or negative figures of years past. The company’s balance sheet is strong, with net cash of $2.4 million.

Despite the greatly improved profitability and healthy outlook, the market affords ELXSI only a modest valuation.



There’s a lot to like about ELXSI. Improved and improving operating measures, a conservative balance sheet and a bright revenue outlook, all at a bargain basement valuation. However, there’s more to the story. I believe the company’s low market valuation is largely due to a large perceived off-balance sheet liability: the possibility that management will continue to extract value from the company that rightfully belongs to shareholders. Just take a look at a few of management’s past actions:

  • Loan number 1: ELXSI loaned $1.16 million to ELX Limited Partnership, an entity wholly-controlled by ELXSI’s chairman, president and principal shareholder, Alexander M. Milley. ELX used this loan to purchase 369,800 shares of ELXSI stock from a third party (famed investor and businessmen Peter Kellogg.)
  • Loan number 2: ELXSI loaned another $909,000 to ELX, to be used to purchase 110,200 shares of ELXSI Corp, again from Mr. Kellogg.
  • Loan number 3: ELXSI loaned $2 million to Cadmus Corporation, an Alexander M. Milley-controlled corporation.
  • Loan number 4: ELXSI loaned another $6.73 million to Cadmus corporation.

In total, ELXSI loaned $10.8 million dollars to entities controlled by its chairman, in part so the chairman could purchase company stock. That is a LOT of capital used to enrich the chairman at the expense of shareholders. And guess what? ELX and Cadmus never even paid the minimal interest expenses accrued on the debt. In 2013, ELXSI forgave the entire balance, both principal and accrued interest, in return for 486,990 of its own shares worth $4.55 million. For those keeping score, that’s a net loss to shareholders of $6.25 million, not including millions in accrued interest and opportunity costs.

In return for the loan forgiveness, Cadmus Corporation also agreed to terminate its management contract with ELXSI. Oh, did I forget to mention the management contract? Since 1989, Cadmus and ELXSI had an agreement specifying an escalating management fee, payable in years where ELXSI’s operating income exceeded $4 million. ELXSI had not paid the management fee for the last few years, letting it accrue. In 2013, ELXSI paid Cadmus $3.12 million to settle the accrued fee and terminate the contract. You read that correctly. Despite shorting ELXSI $6.25 million in principal value on the debt settlement, Cadmus and ELX  somehow still received $3.12 million in cash to settle the accrued management fee.

As a final insult, on January 1, the company agreed to issue Alexander M. Milley 80,000 shares of stock in each of the next five years, providing the company earns at least $4 million for the year. As a result, Mr. Milley is likely to receive back nearly all of the shares his companies conveyed to ELXSI for debt settlement.

Perhaps the days of the worst shareholder abuses are past, but the potential remains for additional value transfers to management at the expense of minority shareholders. For that reason, I’m staying away from ELXSI. It’s a shame, really. I’ve love to own some shares. But when I invest in a company, I need to be confident that my proportional share of earnings and cash flow will accrue to me. With ELXSI, I simply can’t be sure.

Alluvial Capital Managment, LLC does not hold shares of ELXSI Corp.  for client accounts. is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at