“Value is a place you want to be if you want to play again.” – Neil Hennessy

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Found in a Finviz screen, with a very attractive Price to Book of 0.62x.

Hennessy Advisors is an investment management firm founded in 1989, launching its first of 16 mutual and exchange traded funds in 1996. The firm also purchases management contracts and assets relating to management of funds, rolling those acquired funds into the Hennessy brand. Neil himself goes on CNBC often enough, where he advertises his funds and investment philosophies, targeting the mid-market of companies with market caps between $1 billion and $10 billion like SFM (very nice company with a big recent runup, by the way).

The company directly has 17 employees. A beauty is this small cost structure, with the company itself providing a branding umbrella for mismanaged funds or a platform to meet new demands from investor depositors. The company uses unaffiliated sub-advisors to manage some of the funds to improve profitability and relations with regulators.

But this one is a tiny little guy: with 17 employees managing a few funds, market cap was approximately $70mm in 2022, falling 25% over the past couple years to around $54mm today, as the regional banking shakeup saw deposits clench up at banks, and the company had poor fund performance to boot. But even with that down year, HNNA was profitable. With management making $6.5mm of EBITDA and holding 49% of shares, incentives are strong for the company alongside public investors. Another 10% is held by institutions, including 7 ETFs.

Hennessy has a nice balance sheet, with a cash balance of $60mm at FYE2023, compared to total liabilities of $58mm. This mitigates a violation of a cardinal rule in underwriting at commercial banks: do not extend credit to companies whose debt burden would exceed their revenue. In this case, HNNA funded debt of $39mm exceeded its 2023 revenue of $22mm at 177%. Luckily the company itself also operates a straightforward business of advising and managing its mutual funds, collecting on assets under management, and otherwise providing an alternative to bank-held assets.

Thanks to a management recapitalization in 2022, liquidation value is approximately 40-60 cents per share. The stock closed at $7.12 on 6/28/2024. A DCF (income statement and balance sheet at the tail end for reference) indicates average pricing of $6.57 per the two methods below, indicating HNNA is fairly priced.

However, it has been trending up in 2024, diminishing the prudent investor’s margin of safety (currently break even, but if purchased below the current $7.12 mark you are in the money).

Hennessy paid a dividend of $0.55 per share each of the past two years, a yield of 8.5% if acquired at the lows and 7.4% if acquired at the highs – doubling your money in 10 years wherever you acquire (at $7.12, a yield of 7.7%). This is not to mention that the company halved the dividend prior to that, as part of a general deterioration in the stock price and recapitalization. No matter: 7% dividend.

The stock peaked at $12.78 in November 2019 and again at $11.54 in October 2021, before hitting bottom ($6.40) in November 2023 following rate hikes and poor performance. Management halved the dividend to the current 55 cents after 2021.

Pause here to reflect a bit, and discuss the brandy for the first time: https://www.youtube.com/embed/BYSBlxGS7ew

Hennessy’s operations saw a dip in 2023 to $24mm, dropping 19% from 2022 levels. I imagine management saw this coming with the deposit crunch and their own tracking of the Fed rate moves, as the company was able to tighten up expenses and generate reported EBITDA of $6.6mm, a 27% margin. The Company’s customers and management are really dominated by five fund strategies accounting for 75% of Assets Under Management (AUM) and 72% of revenue – Focus, Gas Utility, Midcap, Japan, and Value.

The liquidation value is acceptable here, thanks to the large cash balance. While there is a slight brand to the Hennessy group, even though they are small, the excess of cash the past two years plus dividends paid annually to invest in the stock makes this a very attractive buy, limiting your repayment to just under 10 years. Hennessy has been able to adapt in the shifting sands of the mutual fund and ETF industry, and has a very low-cost structure and the bulk of its expenses are personnel and relationship management with its fund brand partners.

The healthy income statement management, good balance sheet following recapitalization, management messaging about buying quality companies at price to sales under $1.50, and steady performance over the past thirty years maximize the margin of safety here, despite operating in an industry that is commoditized and easily replicable. Management has created a moat for itself, with its branding, comprehensive suite of investment offerings, value philosophy, and messaging of buying quality.