Mar 132006

Zenex International (zenx.ob) is a holding corporation of Aduddell Roofing and Sheet Metal, Inc. Mr. Aduddell is a majority shareholder in the former but the latter is wholly owned by Zenex. So, how’s this stock undervalued?

It is trading at approximately 9 P/full diluted EPS, which is less than the 18 that is the norm for the market for companies growing at about 11-12% a year, which can be said to be predictable growth for Zenex. Zenex has ambitions of becoming a nationally recognized roofing and re-roofing company. To that end, they have launched an agressive marketting and sales campaign that is already showing some fruition. There is enormous growth potential for them, however, it is too early to tell (or I haven’t gotten enough information) on their past growth.

The reason I emphasize full diluted EPS is because earnings for the past quarter were actually 14 cents a share, a sizable difference from 8 cents a share diluted. There are almost 40 million share options out right now to insiders (about 43 million shares actually issued). I like that they reported their fully diluted share price as their earnings for the quarter, it shows conservatism. However, 30 million of these option shares are owned by Aduddell himself, which were issued when he sold the company to Zenex. The company is taking on an unhealthy use of options to pay for things, but the large number of shares and options owned by insiders leads me to believe that there is little chance of these options being exercised in the near future (but if they were, I’d buy because the share price would be so low). What I am saying is that EPS is actually 14 cents a share, which would put the share price of 82 cents at almost 6 P/E rather than the 9 that we see today. Do you follow? I’ll try to clarify:

the shares are trading assuming that 8 cents a share is the earnings per share, but the actual number of shares out there have 14 cents of earning per share. Do you follow now? The shares are undervalued by that little change. If the earnings announcement coming up (on wednesday) changes the reporting and shows 14+ cents per share (because of undiluted earnings) then that could mark a large jump in the share price, but I don’t think that’s likely to happen. If the options owed to addudell expired or were cancelled, it would be awesome.

Anothing point of interest is the large amount of back log (over 15 million dollars in contracts) that htey have, that will smooth over earnings for the historically lower summer season.

Why has god shown only me this? Because the market cap is less than 50 million dollars.

I believe the coming quarterly earnings announcement will be at least approximately 9 to 10 cents per share (fully diluted). There may be more, but I think that the major contracts they received to do work for Katrina has tied up all their personell. When going through their quarterly report, I found approximately 7.2 million dollars of
earnings that were deferred to this quarter. So I think that’s a good sign.

My verdict: Wait and see. Since this is a tiny cap, the catalyst for resolution of the undervaluation can take years, unless they start to grow at an unprecedented rate. But there will be more time to get in on the growth, I think. Since the price of the shares is so cheap, you may wish to purchase some to have easier access to their reports. In the future I would be itnerested in seeing these issues resolved:
– a clear plan created for showing what parts they have already grown to and what parts they feel they can move into
– their competitive advantage. Their report breathes of optimism in their ability to grow, but I want specifics.
– the large number of stock options and their stock compensation plan. I would like to see them never again pay for anything in stock. I would also like to see the number of outstanding options to insiders revoked, reduced or excersized (especially the 30 million of addudell). I feel that their is enough upper management ownership to show that the management has confidence in the company.

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