The other day I participated in an investing podcast hosted by Fred Rockwell of TheBulldogInvestor.com. We discussed a variety of investing topics germane to the micro-cap world. Anyone interested in listening to the podcast can find it here or on iTunes.
At the end of the podcast, I described a stock that I like a lot and have purchased for Alluvial Capital Management clients. The stock is Command Center, Inc. The stock ticker is CCNI. As I type, the stock price is $0.70 and the market capitalization is $46.2 million. Frankly I believe I described the stock fairly well in the podcast but I’ll summarize my views below.
Command Center is a temporary labor provider to blue collar industries like light construction, hospitality, various trades and others. The company has 55 storefronts in 22 states. A number of factors combine to make Command Center stock attractive at these price levels.
Savvy Leadership/Improved Operations
Over the past few years, Command Center has turned itself from an unfocused and struggling company to a well-run and very profitable operation. Management focused on winning high-margin business, controlling operating costs and making each company store responsible for its own profitability. The result has been rapid growth in operating income even as top-line revenue has contracted. CEO Frederick “Bubba” Sandford deserves a lot of credit for the company’s recent success.
Strong Balance Sheet
The company’s success has resulted in a lot of cash flow, and Command Center has used that cash to all but eliminate its debt and build up a substantial cash cushion. Excess cash is around $6 million, or 13% of market capitalization.
Command Center trades at just 6.2x operating income and 5.7x EBITDA (I may have said 7x operating income on the podcast, so please excuse my memory lapse.) The company has a small NOL balance but will likely become a normal taxpayer in 2016. Those are low ratios for any industry, but especially for the staffing industry where low capex requirements and growth potential leads investors to assign high valuations. Command Center’s larger competitors trade at an average of 10.1x EBITDA per the company’s March 2015 investor presentation. Were Command Center to trade at 9x EBITDA, shares would reach $1.05.
Opportunities to Reward Shareholders
Command Center has indicated it will use its cash either to repurchase stock, or to conduct small acquisitions or open new storefronts. The company has approved a $5.0 million share repurchase plan. On the topic of acquisitions, the company notes that many smaller competitors are “mom-and-pop” type operators that can be acquired for only a few times cash flows. Either returning capital to shareholders or investing it productively would be positive outcomes that would benefit shareholders.
Here’s a link to the company’s recent investor presentation, which does a good job illustrating the company’s turnaround and future opportunities. I believe Command Center shares are worth far more than the current trading price and I look forward to seeing what company management can do in 2015 and beyond.
Alluvial Capital Management, LLC holds shares of Command Center, Inc. for client accounts. Alluvial may buy or sell shares of Command Center, Inc. at any time.
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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 email@example.com.
Enjoyed the podcast! Thanks! By the way have you looked at CNRD, RSKIA or IEHC before? I’ve been watching these for a couple of months and they look interesting.
Thanks! I follow all three names. They all look cheap but I have some concerns about each.
Conrad – Huge cash pile and good backlog, but I am concerned that the oil and gas slowdown will hurt demand for their barges. They’re attempting to expand into new markets but that always carries risk. On the whole though, very cheap.
George Risk – Again, the operating business is very cheap when you net out the securities portfolio. But I strongly doubt management will unwind those securities any time soon. Management treats the company like its personal retirement plan. Until the securities portfolio is sold and the cash returned to shareholders, good business performance will produce only muted share price gains.
IEHC – I wrote about this one a long time ago. It’s only about 4x operating income, but where’s the cash? The company is absolutely awful at turning net income into free cash flow. They do nothing except invest in more and more inventory, and that creates a serious long-term risk. Unless the company can improve its cash conversion to the point where free cash flow equals net income, I’m uninterested. It’s not like the company is a fast grower, so why the huge investment in current assets? Poor management…
Thanks for the feedback. I do agree with your comments and that’s why I’m only watching them at this point. I believe Alpha Vulture blog made similar comments about CNRD as well. I still think that CNRD and RSKIA can be good investments depending on the price paid. RSKIA has been buying back some shares and the dividend yield is about 4%.
Just took a quick glance at this one. Looks like it fair number of locations in oilfield areas. I’ve done my best to list them below. Presumably the declines in oilfield activity will negatively affect these locations.
North Dakota: Williston, Minot, Watford City, Dickinson, Bismarck (to a lesser extent)
Oklahoma: Oklahoma City
Most all of the Texas locations
I know for a fact that some large oilfield services companies in the Bakken were using staffing agencies for “temp to permanent” positions that started at $20+ an hour.
There is some oil industry exposure, no doubt. On the other hand, it’s indirect. Command Center is not supplying oil rig workers or roughnecks, just labor to the surrounding industries and regions. I expect Command Center to offset any decline through continued cost improvements and growth in other markets.
Would be more interesting if they didn’t continue to issue shares when they don’t need the cash. The last couple of years, they’ve spent nothing on capex yet diluted share count continued to increase. Probably making their profitability look better than it really is (issuing shares for comp instead of cash?)?
Sure, previous management liked to issue shares. But previous management is in the past. Now, the company has only a small number of warrants outstanding.
An interesting company…
I would add that they bought debt of “Labor Smart”. I think they are looking to take it over in bankruptcy reorg.
Might be a good way to grow sales if it is done right.
Also moving their HQ to a better, bigger city. Probably a good move.
I’ll be watching this one closely.
It’s a good one to watch. I have a conference call coming up with them before long. I will share my notes.
The company has gross margins in the 27%-28% which is at the high end of the industry spectrum. Presumably they have better margins than their larger competitors like Kelly and Manpower because their clients tend to be smaller companies with less negotiating leverage. Do you think there is a risk that increased competition could erode some of those margins or do you view the high margins as sustainable?
I suspect some part of the elevated margins are the result of a very competitive labor market in certain areas, like the oil-producing Bakken region. Now that these pressures are in decline, margins may see a slight decline. Future growth in CCNI’s operating income will likely come from a growing national footprint via acquisitions and organic growth, not margin expansion.
Any insights on the recent price decline? $0.70 to $0.52 is a pretty big drop. Is this a buying opportunity?
I like the stock and I continue to buy more. In my opinion, the decline is entirely the result of the company’s exposure to the oil business. Clearly, that part of the business is struggling. But the market misses the fact that the company is still growing, despite the decline in oil-related revenues. Margins have been compressed recently by some investments the company is making for the future, such as compensating each storefront manager with stock, and increased training for employees. I believe the stock is 2-3 years away from trading at $2 or more.
Any update on this one? Still holding to your investment thesis?
I sold it. I underestimated the impact that falling oil would have on their revenues. And their high operating leverage really bit into profits. I still like them for the long run but I wanted to put that capital to work elsewhere.
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