Spar Group SGRP : Forgotten Nano Cap Value with Strong Growth

SPAR Group (SGRP) is an international in-store merchandising firm. Merchandising and marketing services to manufactures, distributors and retailers worldwide. They run two divisions domestic and international as part of the services sector and diversified services industry.Domestic and International merchandising services offer onsite store event staffing, product sampling, technology, furniture/product assembly and audit services. Services are provided for mass merchandisers, office supply, grocery, drug store, and other retail outlets.The Company operates throughout the United States and internationally in 8 of the most populated countries, including China and India.

Five types of merchandising and marketing services offered; syndicated, dedicated project, assembly and in-store event staffing. Also, SGRP offers syndicated services which consist of regularly scheduled, routed merchandising and marketing services provided at the retail store level for various manufacturers and distributors. The company was founded in 1967 and is headquartered in White Plains, New York. 

Review of the quarter ending 03/31/2014. 

Revenue totaled $28 million, a YOY increase of 12%.Further,the Market Force integration and higher international revenue from new contracts in India, Mexico and Japan contributed to the 12% increase.Yet,domestic operations posted lower gross profit margins due to retail sector weakness from several larger clients.
Additional growth opportunities were announced July 8 2014. The acquired Chinese’s assets are  projected to increase annualized revenue by 7 million.

To address the lower margins management is focused on improving business mix towards higher margin services as contracts evolve. Management expects margin improvement as the overall retail market rebounds and improve product mix. At the same time, international results remained positive with gross profit growing over 15% and operating income increasing over 100% internationally. 

The Company reported a quarterly net loss of $369,000 or $(0.02) per share, prior year quarterly period was 44,000 or .01 per diluted share.

SGA costs increased 720,000 for the three months ended March 31, 2014 compared to the same period in 2013.Fixed overhead in support of 2013 assets acquired from Market Force affected SGA. Additionally, onetime charge for restricted stock awards granted to the Company's prior CEO. Lastly, Mexico and Japan SGA costs were impacted to support revenue growth for the quarter.

07/08/14: "SPAR Group Announces New China Investment Expected to increase International Annualized Revenue by $7 Million "

“Company's subsidiary in China, SPAR (Shanghai) Marketing Management Company Ltd. ("SPAR Shanghai"), has completed an agreement to purchase all the business, fixed assets and established merchandising teams of the following three companies in China: Shanghai Unilink Marketing Execution and Design Co., Ltd, Shanghai Gold Park Investment Management Co. Ltd, and Beijing Merchandise Sales and Marketing Co., Ltd. (collectively, "Unilink"). As consideration for the purchase, Unilink will receive cash and 20% ownership in SPAR Shanghai. At closing SPAR will have 51%, Shanghai Wedone Marketing Consulting Co. Ltd (its current local investor) will have 29% and Unilink will have 20% of the SPAR Shanghai ownership interests.”
“Unilink is devoted to providing integrated marketing services to its clients in China. Over the past decades, Unilink has worked with brands that include McCormick, Clorox, BIC, Shiseido, Meiji Dairy, UHA, COFCO and Bright Dairy. Unilink's established merchandising teams executed more than 300,000 in store visits annually, currently covering almost all hyper markets, supermarkets and convenience stores in Shanghai and East China, Beijing, Guangzhou and Shenzhen.
Some of SPAR Shanghai's existing clients include Coca-Cola, Apple, PUMA, and Johnson & Johnson. SPAR Shanghai provides a broad range of merchandising, in-store promotion, store auditing, mini-road show services, POP material design, creation and production services.”

SPAR is down -43.51% for the 52 week ending period near 52 week low with a 27.88M market cap and 28.32M enterprise value.Current price per share is $1.35 (07/30/14).

The table below highlights historical valuation discounts for sales, gross profit, book value, EBIT, and EBITDA. Note that YOY top line growth of 12.20% and recent additional China business provides more importance to the current valuation. But it's important to note gross margins have been declining. Management has addressed the margin concerns and will adjust mix of services provided. 

Current TTM price to tangible book (P/TB) of 2.38 compared favorably to the 3 year P/TB average of 3.31 for the periods 2013 (3.48), 2012 (3.74), 2011 (2.72).The average P/TB for the 4 year period from 2007 to 2010 was 5.38.

Enterprise value to sales (EV/Sales) TTM.26 compares favorably to EV/Sales of .38 for the 3 year average from 2011 (.32), 2012(.41) and 2013 (.41). The 4 year EV/Sales was .31 for the 4 year period 2007 (.31), 2008 (.27), 2009(.33), to 2010(.33).

TTM enterprise value to gross profit (EV/GP) 1.07 contrasts favorably to 1.41 for the 3 year average from 2011 (1.04) to 2012(1.51), 2013(1.67).

Additional metrics

Current Metrics:

Price/Sales (ttm):  0.24 , Price/Book (mrq): 1.78
Enterprise Value/Revenue: 0.24 , Enterprise Value/EBITDA: 8.09
Return on Assets (ttm): 4.86% , Return on Equity (ttm): 22.41%
Qtrly Revenue Growth (yoy): 12.20% , Gross Profit (ttm):  27.60M
EBITDA (ttm):  3.40M
Total Cash (mrq): 4.24M , Total Cash Per Share (mrq):0.21
Current Ratio (mrq):  2.15 , Book Value Per Share (mrq):   0.76
52-Week Change:   -43.51%
52-Week High: 2.40 , 52-Week Low :  1.27
Shares Outstanding: 20.65M , Float:  6.51M

% Held by Insiders: 69.91% , % Held by Institutions:5.90%

In conclusion these are some attributes that make SGRP (a risky investment) an interesting stock to INVESTIGATE further.
Stock price is down -43.51 % for 52 week period, solid financial position( high z score over 5),  diversified customer base domestically and internationally,  cheap on an absolute valuation with mean reverting valuations, double digit top line growth, recent additional international opportunities in china materially adding to top line, focus on improving profitability mix of services provided, and an exceptional ROIC.

You can get further clarity and color on the recent Spar Group earning call. Earnings call is available here. The conference call was professional and informative.Only one brokerage asked questions, Sidioti. 


Long: SGRP