Commercial roofer Aduddell Industries (ADDL-$0.56) is implementing vertically integrated growth strategies that—if successful—should produce the catalysts necessary to drive organic and acquisition-based growth.
In the second half of 2006, Aduddell increased the scale and scope of restoration services to include the total exterior envelope of a building through the asset purchase of Merit Construction and Brent Anderson & Associates, Inc., a Minnesota based restoration, roofing and waterproofing company.
The $1.08 million acquisition of Merit demonstrated the Company’s acuity to grow company assets by seeking out only accretive, complimentary business combinations. This purchase launched its restoration division, which eliminated Aduddell’s need to outsource restoration projects, while increasing restorations market opportunity and allowing the roofing segment to cross sell services to customers (and increase the aggregate restoration division sales).
The segment’s sales increased from $4 million in 2005, to over $6 million in 9 months of 2006, and continued to grow with a backlog in excess of $10 million at year-end.
The Company has signed definitive purchase agreements to acquire Hayden Building Maintenance, Inc. as well as Hudson Valley Roofing and Sheet Metal, Inc., privately held commercial roofing companies in New York.
Of concern, because of inadequate financing, management does not expect to close on the purchases by the previously announced May 18, 2007, closing date (known risk of a penny stock—inability to use equity as currency). Aduddell continues to seek acceptable financing and remains hopeful that it will proceed with the acquisition(s) at a future date. The 2007 combined revenues of these two companies would add over $4 million in revenues.
Hayden Building Maintenance has an office in New Orleans that is currently actively involved in commercial roofing related to disaster response.
Roofing Market Overview
In the roofing market, there are more than 50,000 companies with more than $25 billion in annual revenues. This is a highly fragmented industry, which presents multiple candidates for acquisition by Aduddell Industries in its goal to build a national footprint. No single company accounts for more than one percent of this market and most roofing companies are independent operators with limited access to capital for expansion.
Benefiting from Hurricane Season
In fiscal 2006, Aduddell entered the national emergency response market by creating AdudEnviro & Emergency Management Services, Inc. (E2MS), a subsidiary that is positioned for growth in pre-event preparation and recovery-response to weather-related and man-made disasters. Headquartered in Stuart, Florida, with an additional office in Boca Raton, E2MS is responsible for all disaster-driven Aduddell roofing projects, both public and private. E2MS is also cross-selling the parent Company’s complete roofing and restoration services, as well as marketing a number of environmental services that answer a myriad of urgent needs in the wake of natural and manmade disasters.
It is not a question of if the next disaster will occur, but when. Largely due to the rapid dissipation of El Niño conditions, scientists affiliated with the Tropical Meteorological Project are calling for a very active hurricane season (officially June 1 – November 30). Their extended Range Forecast of Atlantic Seasonal Hurricane Activity and U.S. Landfall Strike Probability for 2007 includes about 17 named storms, 9 hurricanes, and a 50 percent probability that at least one major (category 3,4, or 5) hurricane will slam into landfall (the U.S. East Coast, including Peninsula Florida) in 2007.
Calamity is virtue's opportunity. -- Roman philosopher, Seneca the Younger (4 BC - 65 AD), De Procidentia (IV) [Misfortune]
Albeit the probability is slight that 2007 will come close to matching the devastation of the 2005 Atlantic hurricane season—which included 26 named storms, 13 hurricanes (of which seven were major), and more than $200 billion in financial losses—we believe Adudell has positioned itself to maximize revenue from any disaster event—including other weather-related emergencies (tornados, fires, and flooding).
Revenues increased from $3,734,577 for the quarter ended March 31, 2006, to $9,952,242 for the quarter ended March 31, 2007. Revenues for 2007 included a 78.2% growth in roofing revenues as well as $3,185,471 of revenue in the new business line, restoration services.
The quarterly loss increased from $(114,513), or a net-loss of one cent per share, to $(2,615,893), or a share-net loss of five cents, primarily due to lower margins associated with certain project delays, cost overruns (which have been addressed), and infrastructure investments (higher selling, general and administrative expenses of $2.8 million). However, free cash flow improved to $(653,350) from $(14.62 million) in the prior year.
The Company's current backlog is approximately $27 million, up from $11 million at this time last year. In addition, the Company pointed out that its business is seasonal and first quarter revenues and profits are typically significantly lower than in subsequent quarters.
Management expects profitability to improve in the 2H:07, as cost reduction initiatives and function consolidations currently in place lead to quarterly reductions of more than $670,000 in administrative costs (coupled with higher sales volume and increased margin).
For an emerging growth company, Aduddell has a strong balance sheet, with only $582,681 in long-term debt (an earn-out provision), long-term debt-to-shareholder of 6.4 percent, and a book value of 17 cents per share.
One concern, as previously mentioned, with about 53.9 million shares outstanding and a share-price of 56 cents, the common stock will prove to be of little currency value in financing any future acquisitions.
Reading Between the Lines
We expect the Company to show a sequential improvement in fundamentals in coming quarters, due to its recurring revenue model (75% of all roofing expenditures are attributable to re-roofing, restoration, and repair) and cost initiatives. Nonetheless, we doubt upward price momentum in the underlying stock price will begin until management can demonstrate to investors that it can offer sustainable revenue and profit growth.
Still, for those investors looking to speculate on a low-priced “Hurricane Stock,” Aduddell Industries is our suggested idea.
Investment Risks and Considerations
Aduddell intends to supplement its organic growth primarily by acquiring commercial roofing companies in existing and new markets. The success of this acquisition strategy will depend on the extent to which management is able to identify, acquire, and successfully integrate and profitably manage additional businesses.
Commercial roofing is a seasonal industry and can fluctuate based on weather conditions. Aduddell’s operations and the demand for its roofing services can be expected to fluctuate from quarter to quarter due to a variety of factors, including but not limited to, adverse weather and the timing of acquisitions. For example, mild, dry weather results in reduced demand for the number of roofs in need of repair. Conversely, adverse weather increases the number of roofs in need of repair, but due to the increased demand and the inability to render services during such periods, severe weather can delay the time it takes to complete a roofing project. Accordingly, management expects its revenues and operating results generally will be lower in the first and fourth quarters of each year.
E2MS is new to the disaster-response market and faces tenured (‘politically-connected’) competitors. In fiscal 2006, Aduddell derived no revenues from pre-event planning, event management and post-event recovery services for disaster related activities.
The Company is making inroads in 2007, by leveraging relationships in the roofing and restoration markets. Management has negotiated a number of pre-event contracts as first responders in the event of an emergency. In one of these contracts, E2MS has been named the preferred vendor for emergency planning and response by ASFONA - The Association of Starwood Franchisees & Owners of North America, and is the primary subcontractor to James Lee Witt Associates for emergency roofing and miscellaneous construction for their contracts with the State of Rhode Island and the State of Virginia.
Aduddell’s executive officers and directors owns approximately 76% of the outstanding common stock, with majority shareholder, Timothy Aduddell, beneficially owning about 67% of the Company float. Accordingly, such persons will have a material influence on board and company affairs, which might not always be consistent with the interests of other shareholders.
In our view, save for a lease with Aduddell Holdings, Inc., (a corporation wholly-owned by Tim Aduddell) for Aduddell Roofing’s office, warehouse and yard facilities, there are no conflicting corporate governance issues.