EACO CORP (EACO) stock intrinsic value fair value estimate & owner earnings analysis

EACO Corporation is a holding company whose operating business is Bisco Industries, a distributor of electronic components and fasteners (connectors, fuses, standoffs, card guides, hardware) to manufacturers. Bisco began in Illinois in 1973 and sells from 51 offices in the United States and Canada plus one in the Philippines, stocking items from more than 325 manufacturers. It has over 10,000 customers; none is more than 10% of sales and the 20 largest are about 17.5%. No supplier is more than 10% of purchases, though Bisco's distributor agreements can usually be cancelled by either side on short notice. Sales grew from $140.2 million in fiscal 2015 to $427.9 million in fiscal 2025 (11.8% a year) and rose in every one of those years. Fiscal 2025 sales were up 20%, with gross margin of 30.1% against 29.8%. For the first nine months of fiscal 2026 (to May 31, 2026) sales were $371.1 million (+21.5%), gross margin 31.0%, operating income $43.3 million (11.7% of sales) and net income $32.7 million against $23.2 million a year earlier. The fiscal 2026 annual report is not yet filed, so the last full year we rely on is the year ended August 2025. How we measure earnings. We take cash from operations, remove the swing in receivables, inventory, prepaid items, payables and accruals, deduct equipment spending needed to stand still (there is no stock-based pay), and divide by 4.90 million shares (including the 40,000 shares the convertible preferred would become). On that basis cash earnings per share were: 2016 $0.92, 2017 $0.70, 2018 $1.49, 2019 $1.80, 2020 $0.36, 2021 $2.03, 2022 $4.55, 2023 $4.43, 2024 $3.57, 2025 $7.07. Each year ties to the cash-flow statement. Two judgements matter. First, the $31 million purchase of the Anaheim headquarters from the chief executive's family trust in October 2023 (and the $7.2 million Lakeview building in 2017) is treated as a one-time property purchase already reflected in the company's cash, not as ongoing equipment spending; the rent no longer paid shows up in later cash flow. Second, fiscal 2024 bears a one-time $7.8 million wage-and-hour class-action settlement (paid in September 2025), so we leave that year out of the starting point. Earlier internal figures for these years were calculated differently and are replaced. Because Bisco must fund receivables and inventory to grow, we do not treat growth as free: over fiscal 2016 to 2025 it absorbed $76.4 million of working capital while adding $287.7 million of sales, about 27 cents per added dollar of sales, and each case below pays that cost for any growth it credits. Starting point. Fiscal 2022 was the peak of the component shortage (the large distributors Arrow and Avnet had record sales around then), so we begin with fiscal 2023, which includes the industry decline that followed, and skip fiscal 2024. The middle of fiscal 2023 ($4.47) and fiscal 2025 ($7.11, cash earnings before the small interest bill) is $5.79 a share, about $28 million. Growth-path check: cash earnings per share rose 98% in fiscal 2025 ($7.07 against $3.57), but that comparison is flattered by the settlement; the base case assumes only 8% in its first year, applied to $5.79, giving $6.25 before the working-capital cost of growth ($4.40 after), below what the company actually earned in fiscal 2025. We do not rely on the nine-month results to raise the starting level. Growth credited. Bisco has opened offices and added salespeople every year for a decade, funded from its own cash, through the 2020 shutdown and the 2023 to 2025 component downturn; it hired about 40 more people in fiscal 2025 (604 to 644) and plans an office in Chihuahua, Mexico. We credit growth at or below the 11.8% record, fading as the base case reaches 3.5% by year 10. We leave out any further margin gains, new products or markets, and share gains. After year 10 nothing we can evidence suggests growth, so earnings are held flat for ten more years (a business operating since 1973 with thousands of customers) and then valued at nothing. Base case: earnings of $5.79 grow 8% in year 1, fading 0.5 points a year to 3.5% in year 10, reaching $10.12 a share in year 10, then flat for ten years. The business is worth about $88.05 a share. The company owes a $4.1 million bank term loan (fixed rate about 4.35%, due May 2027) against $33.2 million of marketable securities and $0.8 million of cash at May 31, 2026, so it has net cash of about $29.9 million, or $6.10 a share, which we add. Base value: $94.15 a share. Bear case: the industry's own record is the guide. Arrow's sales fell 25% from 2022 to 2024 and Avnet's fell 16% from fiscal 2023 to fiscal 2025, and Bisco's four-year-old margin could be reversed: net margin was only 2.6% to 4.3% in fiscal 2016 to 2021 and cash earnings were a median 3.4% of sales. We assume sales fall 25% over two years (to $321 million, the fiscal 2023 level), cash earnings fall to 3.4% of sales ($3.36 then $2.23 a share), sales then grow only 3% a year to reach $2.82 a share in year 10, are held flat five more years, and then end. No release of working capital is credited because Bisco has not had a sales decline in ten years, so there is no record of how much would be recovered. The business is worth about $22.57 a share, the company has net cash of $6.10, so the shares are worth $28.67. The loan is covered many times over by cash earnings in every year of this case. Bull case: the fiscal 2025 level of $7.11 continues, grows 11.8% in year 1 (the ten-year record) fading to 4% by year 10 ($14.79), then flat for ten years: business $124.81 plus net cash $6.10 gives $130.91. It requires no step-up in margin beyond what has been reported. Trying to break the case. The load-bearing assumption is that the post-2021 margin lasts. Against it: net margin was below 4.3% every year through 2021. For it: it held at 6.6% to 7.5% in fiscal 2023 and 2025 and rose to 11.7% operating margin in 2026 while Arrow's sales fell 25%, and Bisco's gross margin has stayed at about 30% to 31%. We cannot separate scale economies from a good stretch, so the bear case takes the margin back. A second test was the tail: the supplier agreements are cancellable, but no supplier exceeds 10% of purchases and no customer exceeds 10% of sales, which supports holding earnings flat rather than ending them at year 10. Previous published figures were built on a different basis and are not comparable. Things we could not reconcile. Nine-month fiscal 2026 operating cash flow was only $4.5 million against $32.7 million of net income. Prepaid and other current assets rose from $5.0 million to $19.2 million and income taxes paid ($23.5 million) were about twice the tax expense ($11.2 million), which fits together, but we could not read the quarterly report's explanation. Our cash-earnings figures remove working-capital swings, so they are not affected, but the year-end explanation remains to be seen. The company's $20 million bank line, undrawn at August 2025, was due to expire February 15, 2026; we could not confirm its renewal. Other risks. The chief executive's trust holds 4,662,813 of 4,861,590 common shares (95.9%). The company has bought buildings from that trust twice, management concluded internal control over financial reporting was not effective at August 31, 2025 (a material weakness in closing and reporting), one earlier annual report (fiscal 2021) was filed in July 2022, shares are quoted on the OTCID market with low trading volume, and the company invests in other companies' shares, both long and short ($1.27 million net gain in fiscal 2025). In fiscal 2024 and 2025 the only cash paid to shareholders was the $76,000 preferred dividend. Margin-of-safety price of $45. We are fairly sure of the level of recent earnings, since every year ties to the cash-flow statement, but less sure it lasts, since the current margin is four years old. The worst plausible case is a component downturn that also takes the margin back to its old level, leaving the shares worth about $29. The business would survive that: it has net cash, no meaningful debt, no dependence on one customer or supplier. What it would not protect against is the controlling owner, or a loss on the $33.2 million securities portfolio (we count it at market value in every case), neither of which any case models. If we are wrong about the margin lasting, or about holding earnings flat after year 10, the shares are worth materially less than the base case. Nothing is paid to outside shareholders and trading is thin, so the price assumes a three-to-five-year holding period, during which cash earnings of roughly $5.79 to $7 a share a year build inside the company. At $45, the net cash alone is $6.10 a share, and the middle fiscal 2023 to 2025 cash earnings of $5.79 would be a 12.9% annual yield on the price before any growth, with sales growth well below its ten-year record on top; at that price a year of poor results, or the bear case arriving, implies a loss that later years could recover, while the more likely outcomes imply at least 20% a year.