May 10, 2009

Aldila: Another Interesting Company

Cigar-butt companies have that particularity that they are cashflow machines on the end of their life. They are rarely fashionable and trendy on the market and that is one of the reasons why they are often undervalued for long periods of time, which in turn makes them very attractive for value investors. But some of them defy that rule.

Being an investor without very much experience on the market, companies that make my portfolio tend to be screaming bargains, by that i mean bargain and near arbitrage situations that are so obvious that one would need to be blind or underestimating of his own intellect not to take advantage of them.

From their website, we can get that Aldila, Inc. designs, manufactures and markets high performance graphite golf shafts used in golf clubs assembled and marketed throughout the world by major golf club companies, component distributors and custom clubmakers, and is a leading shaft brand among consumers and on the PGA tour. Aldila also manufactures hockey sticks and most recently hockey blades, in addition to composite prepreg (Carbon fiber reinforced polymer) material for its golf shaft business and external sales. Externally, Aldila manufactures carbon fiber for internal use through and ownership interest in Carbon Fiber Technology, LLC.

The company describes itself as having the hottest shafts in golf and that doesn’t go without reason. We could be led to think that huge companies specialized in sports equipment, like Callaway Golf would be their competitors but in fact companies like Callaway are clients of Aldila Inc. To make things clear, companies like Aldila manufacture the shafts of golf clubs and then sell them to club manufacturers like Callaway. Taking those fact into account, there are really not many competitors to Aldila.

What’s even more interesting is that many professional golfers like Tiger Woods and Boo Weekly, and many more regular players are using the shafts developed by Aldila on their clubs.

Another interesting thing is the dividend history of the company. As soon as they get an interesting amount of retained earnings, the management of Aldila Inc. distributes a special dividend over the usual dividend. In 2005, the company distributed 2.30$ per share and in 2008, they distributed 10.30$ per share. I am convinced that they will not be able to accomplish that during FY 2009, but am confident that with an average cost per share of 2.54$, if they happen to give, in 2010 or 2011, a dividend equivalent to the amount given to shareholders in 2005, I will be very tempted to scoop up more shares for the long haul and even more if they go 50% or more lower than my average purchasing price. I intend to hold my position for as long as necessary.

Full disclosure: the author is long on ALDA

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