Nano-cap Trading Under Liquidation Value

It isn’t often you find a cheap stock in today’s market. Valuations are lofty. Multiples are elevated. And the true deep value stocks are nowhere to be found.

Despite the lofty valuations, there is still value to be found. You just have to search harder. So when you find something cheap enough, it pays to step up and swing at the plate.

Today I am writing about a cheap company with the following metrics.

• The company has a net cash balance sheet

• Once you back out of the cash from the valuation you get an enterprise value of just $22 million.

• Inventories on the balance sheet are worth 4x more than the enterprise value.

• The company owns a website that generates 100 million view per year.

• The stock has gotten absolutely hammered with the market cap down over 65% in a year.

• Management has made key investments in 2024 that should lead to higher sales and lower costs.

• The company has historically generated significant free cash flow and in my opinion, there is no reason why the company shouldn’t be able to generate cash flow in future periods.

• A low market cap and poison pill limits institutional investors from getting into the stock while it is still cheap, giving retail investors who do their own homework an advantage.

• The company owns an extremely valuable domain name. Similar domain names have sold for multiples of the current enterprise value.

• At the current valuation there appears to be limited downside and significant upside should the management team execute on a turnaround.

Carparts.com (PRTS) is a nano-cap company that sells car parts online through there website carparts.com, an eBay store and Amazon store. With a stock price of $1.06, the company has a market cap of $60 million and enterprise value of $22 million.

The stock has gotten hammered over the past few years. Carparts.com was a COVID beneficiary. The stock hit all time highs of $20 per share in 2021 and since then, the valuation has went straight down from poor financial results.

Despite the collapse in the stock price, the company has significant assets that are likely worth more than the current enterprise value. Here is my high level thesis:

• The enterprise value is only $22 million. There is $38 million of net cash on the balance sheet, $97 million of car part inventories and $8.4 million of accounts receivables. Assets are offset by $60 million of payables and $19 million of accrued expenses.

• Sales peaked at $675 million in 2023. Guidance for 2024 are $595-600 million of sales. Sales have fallen from a weakened consumer, the company making strategic investments to replatform the website and a warehouse move in Las Vegas. I expect sales to return to growth in 2025 and potentially beyond as the replatforming of the website should lead to higher basket size, a faster website and the ability for the company to rollout additional features.

• Revenues have fallen in 2024 due to the recent re-platforming of the website, an effort to increase average SKU prices for gross margin improvement, and softer consumer demand. Previously, the outdated website infrastructure limited the company’s ability to enhance the shopping experience. However, the new platform allows for faster, cost-effective implementation of new features, which could drive improvements in order frequency, conversion rates, and basket sizes.

• Gross margin expansion is underway, with margins rising to 35.2% in Q3 2024 compared to 32.9% in Q3 2023. Additionally, the company has eliminated $10 million in annual costs. Capital expenditures for 2024 are over $20 million, largely due to the website re-platforming and relocating the Las Vegas distribution center to a lower-cost facility. For 2025, capex is expected to decrease to $8-$10 million. Over the long-term management is forecasting EBITDA margins of 6-8%. If management comes even close to these EBITDA margin targets the stock is a multi-bagger.

• There is a poison pill that limits any single investor from acquiring more than 5% of the common stock. The company implemented this poison pill to protect the valuable NOLs of over $100 million. Given the market cap of only $66 million, this limits many institutional investors from owning the stock given the absolute low level of dollars they can put to work.

• The company is attempting to grow B2B sales channel which has historically only represented less than 5% of sales. B2B sales have high margins and any growth achieved here should raise overall gross margins. The company has recently hired two B2B salesmen in Texas and Florida to go out and win new business and over the next 12-18 months we could see significant improvement on the B2B side.

• They own the number one eBay store in the world which generates $130 million of revenue for the company.

• Historically the company has only ever ran Google ads. The company recently hired a new ad tech individual to start running ads across multiple social media platforms.

• At the current valuation the company is a sitting duck for a strategic to come in and potentially take the company out. With an enterprise value of only $22 million, a buyer at the current valuation is getting a lot of assets for free including $100 million of inventory and a website that generates over 100 million of annual views.

• I expect the company to return to generating free cash flow in 2025. The warehouse move and the replatforming of the website are done. Average sku prices are rising. And gross margins are beginning to re-rate.

• There isn’t much downside at the current valuation and if EBITDA margins return to even just 2% (historically the company has generated 3-4% EBITDA margins) the company is trading at less than 2.0x EV/EBITDA.

• Risks include the management team not executing on the turnaround, continued customer pressure, and product margins falling even further.

Carparts.com isn’t a complicated story. The company has a website that generates over 100 million in views, the number one eBay store in the world, $100 million of inventories, owned equipment in their warehouses and an enterprise value of only $22 million. The stock has gotten hammered and the valuation is so low that institutional investors simply cannot put enough money to work to make an investment worth their while. I think there is limited downside and material upside if the management team turns the business around.

Disclosure: I do not own carparts.com (PRTS). This is not investment advice. I am not an investment advisor.