Micropac Industries

Micropac Industries (OTC: MPAD)

Current price (3/15/11 $9.10)
Price at time of research (2/22/11 $6.50)

This stock is a bit of a heartbreak for me, I compiled the research below when the stock was trading at $6.50 and felt it was a great buy with a nice margin of safety, and placed a buy order that never hit.  About three days after I placed my buy order the stock zoomed up to $12 on larger than normal volume of around 10k shares a day.  If Micropac falls lower I would be interested again, but for now the margin of safety has disappeared.

Summary
Micropac is in the semiconductor business, they build chip assemblies used in military grade equipment.  Micropac is one of a few companies who's products are space qualified which puts them in a niche of higher end semiconductor components.  The business is located in Texas and owned by a large German majority shareholder.

Highlights
While the semiconductor business is a commodity business the valuation of Micropac is compelling enough to consider buying the stock.
-Market cap of $23m
-The company has $10m of their market cap in cash.
-EV of $13m and EBIT of $3.9m
-EV/EBIT of 3.33
-The company has steady cash flows, and low growth as seen by the below breakdown of revenues and income for the past five years.

-The gross margin appears to be on the high end of the range, I wouldn't be surprised to see that margin compressed in future quarters.
-Net income margin is slightly above the six year average of 9.05%

Pros
-The company has positive OCF and FCF even through the 2008-2009 recession.
-Positive retained earnings.
-The majority owner (75%) is on the BOD and does not seem to be agitating for too much change.  I'm unsure of what his position with the company is.
-Pays a $.10 dividend per year

Cons
-There is a very small float, around 600k shares out of the 2.5m outstanding.
-Extremely illiquid, the average trading volume is a few hundred shares.  It only traded four times in January.  As an example two trading days of 10k shares pushed the price from $6.75 to $12.
-Management is paid around $230k apiece with no equity portion.  There is no equity incentive plan, and equity ownership by management is very low.
-Very low visibility into the business, just the standard quarterly filings and nothing else.  Portions of the website look like they were last updated in 2007.

Valuation
-12% cash flow yield at the current price.
-22% cash flow yield ex-cash
-10m in cash + securities
-Trading at a EV/EBIT of 7 it trades at 12 for the business value plus 4 per share in cash + securities giving us a value of $16
-Trading at 16 gives a P/E of 11.4
-This is my net-net worksheet for this stock:

-Here is the worksheet for the accruals ratio, which I should note is very low which is good.