Art’s Way Manufacturing – ARTW

Today’s topic is one of my favorite tiny manufacturers, Art’s Way Manufacturing Company. Art’s Way, founded in 1956, is based in Iowa and trades on the NASDAQ. Art’s Way had 2012 sales of $36.5 million and has a market cap of $28.4 million.

Despite its small size, Art’s Way is the nation’s largest manufacturer of sugar beet harvesting equipment. Sugar beets are the source of 20% of the world’s sugar production and are grown around the world, especially in cooler climates where sugar cane cannot survive. Art’s Way also makes a variety of other agricultural implements, like grain augers, hay balers and manure spreaders. Art’s Way avoids competing in the market for extremely sophisticated and costly tractors and combines, instead focusing on simpler farm implements.

Over the last decade, Art’s Way has added business lines including pressurized vessels and modular buildings commonly used for animal containment and agricultural research.Art’s Way’s agricultural products accounted for 67.8% of revenues in 2012. Modular buildings accounted for 26.5%, while pressurized vessels made up 5.7%.

While Art’s Way is now a profitable and growing company, it wasn’t always so. The company flirted with bankruptcy in 2002 after several years of sustained losses. An infusion of capital kept the company afloat, and J. Ward McConnell, Jr. took over as chair.

Mr. McConnell has orchestrated quite a turnaround. Under his leadership, Art’s Way has been a shrewd acquirer, adding many new product lines as well as the vessels and modular buildings segments. Since 2005, Art’s Way has made small tuck-in acquisitions and introduced new product lines at the rate of nearly one per year.

transactionsAll of these transactions were financed by internally-generated funds or through bank debt. Shareholders have seen diluted shares outstanding increase by only 4.5% since 2002.

The result of these small, easily-digested acquisitions has been steady expansion of revenues and profits.

growthAnnual revenue growth of 12.8% and earnings growth of 16.7% over a decade is extremely impressive. Art’s Way was affected by the financial crisis and saw its annual revenue decline 18% from 2008 to 2009, but the long-term trend shows sustained growth. An investor who purchased Art’s Way at a split-adjusted price of $1.45 on December 31, 2002, made an annualized return of 15.5% over the next decade.

Results through May 31, 2013 show a slight decrease in revenue and EBITDA compared to the half-year ended May 31, 2012, but net income and free cash flow reached new highs. Revenues in the agricultural products division rose 22.7%, but the modular buildings division saw its revenues decline 62.2% as some large contracts were completed. Since the quarter’s end, Art’s Way has announced additional contracts for the modular buildings division.

Art’s Way’s trailing valuation looks quite reasonable. At a share price of $7.00, the company’s trailing P/E is 9.9.  Art’s Way carries net debt of $6.02 million, for a trailing EV/EBITDA of 7.2. Trailing results do not include Agro Trend’s contribution, since it was purchased so recently. If agricultural sales stay strong and the modular building segment rebounds, Art’s Way’s valuation could be much lower a few quarters hence.

Truth be told, Art’s Ways short-term results concern me very little. That’s because I believe Art’s Way is one of those rare companies capable of earning a high return on capital, and capable of reinvesting the great majority of its earnings at high rates of return. The combination of the two results in swift growth in book value per share, which ultimately drives returns. Art’s Way’s average ROE for the past decade was 17.9%. The company pays out about 15% of its earnings in dividends, leaving plenty of capital to compound.

The chances of that compounding continuing are good. Art’s Way’s capital allocation policy has been excellent under Mr. McConnell. The company’s practice of identifying and acquiring the neglected divisions of other companies at modest prices is scalable and repeatable. For all its growth, Art’s Way still does less than $40 million per year in revenue. Another decade of similar growth would result in annual turnover of $122 million. That’s not hard to imagine in a world where Deere & Co. does $36 billion in annual revenue and Case New Holland does $20 billion.

Risks to Art’s Way’s continued success include a slump in crop prices, particularly in sugar beets. Changes to sugar subsidies in the US farm bill could result in fewer acres of sugar beets planted. And of course, extreme drought or flooding could disrupt Art’s Way’s customers. Despite these risks, Art’s Way looks attractively priced relative to current earnings and the long growth runway ahead of it.

I own shares in Art’s Way Manufacturing.


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13 Responses to Art’s Way Manufacturing – ARTW

  1. kalidasa says:

    Hi otcadventures,

    great post and digging work. I am curious, how do you find these companies? Can you please detail your approach and maybe, a couple of filter criteria. What to look for, what to stay away from.

    I cant believe that this company has steadily returned 15% over the last decade. There was no way i would have discovered if not for your site.

    once again great job, i am learning a lot.

    One other question i had was, why is TPRP not on your conviction buy list or you havent bought it already. it sounds compelling.

    • otcadventures says:

      Hey thanks for the kind words. I really don’t have a secret for finding good companies. I just read through hundreds of filings and reports in any given month. Once in a while I find something promising. I am thinking about doing a post soon outlining a few of the things I look for and also what I avoid.

      Art’s Way did return 15% per year from 2002 to the end of 2012, but it actually wasn’t steady at all. The stock price swung pretty wildly at times. At one point in 2008, the stock price hit nearly $18! The lesson is sometimes the market goes crazy with optimism, and investors who sold at the peak could have avoided a great deal of losses. The other, more important lesson is that if you find a company with good management, good capital allocation and an industry with a future, you don’t have to worry about the ups and downs because you will usually do just fine in the long run.

      As for Tower, the only reason I didn’t include it on the list is because of how infrequently it trades. Even though the mid-point is in the $8,000s, the last trade was at $7,900. Including it would give the appearance that the stock is down 10% since I profiled it, which is not the case. It simply hasn’t traded.

  2. rohit says:

    Very nice company and a great find OTC. Whopper, oddballstocks and you have got me hooked onto these microcap names.
    These companies are so much more easier to understand and follow. The reports are neatly explain everything. I rarely understand everything from a report of a large cap company, but these i can go through 3-4 a day easily and still understand it. In this particular case, I listened to the conference call on the web and it was gratifying to see a management which was so open about their business and genuinely interested in explaining their thoughts even though there was only one questioner. Compared to conference calls on some large cap names where the questions and answers are pretty much pre-processed, this was truly refreshing.

    About the valuation of this company at this time. I think its a fair price now @7. It is not a bargain by any means unless you are extremely confident about the sales growth. Its a fair price for an average business with a good management. What are your thoughts on margin of safety here?

  3. Martin says:

    Nice writeup. I think it’s better value now for $5.68 and initiated a small position

    Did you know the EU is changing sugar subsidies sending shares of german südzucker down? This could improve demand for US sugar although I have to admit I don’t know the overall market well.

    I hope this small aquisition in Canada turns out to be a smart and cheap move to gain a foothold in canada. Is this normal for companies with such a small market capitalization in the US to give quarterly conference calls? I am impressed.

    • otcadventures says:

      Hello Martin,
      ARTW had a really tough couple of quarters, which has pushed the share price down by quite a bit. I agree with you that this could be a buying opportunity. I was unaware of the EU sugar policy change. Hopefully any increased demand would translate into additional revenue.

      Ward McConnell has a track record of smart acquisitions, so I think the recent purchases in Canada and Ohio should work out well.

      I’d say it is somewhat unusual for such a tiny company to be so communicative, but then again the company is NASDAQ-listed and seems to have aspirations of bigger and better things. It’s definitely a plus that management is willing to answer nearly any and all questions from shareholders each quarter.

      • rohit says:

        Yes, I agree now there is a good margin of safety in this price now. Nothing much seems to have changed in the business as such. Their original business is increasing sales and have new products now, so sales should pick up (at least temporarily). Their Vessels business which was ironically bought to provide diversification and smooth over the cyclical nature of the original business is now the cause of big swings in Sales each quarter. Not something to worry about though, the management seems to be honest and good allocators of capital, so buying now and waiting increases the likelihood of good things happening.

  4. Tj says:

    Curious if you still hold your position in this. I looked at ARTW in the past but never could get excited about it at the then prices. Since it’s slowdown, I’ve been trying to find a play in the agricultural sector and stumbled back upon this company. Will probably allocate some time to it over the holiday weekend.

    • otcadventures says:

      Art’s-Way has been frustrating. Seems they have had trouble with leadership transition and their newest acquisitions have not paid off as well as earlier ones did. I think they will be fine in the long run but in the short-term they are dealing with low demand for their modular buildings. Once they get that division righted, they’ll be fine.

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