Trading at $3.40 (5/31/2011)
I am going to try a different format for this post, instead of bombarding readers with an epic post about one company I'm going to break it apart over a few days with possibly a small post mixed in. I'm hoping this will accomplish two things, readers will find the information easier to digest and the posts will spur deeper thinking which can be captured in a later post.
So without further ado I present Solitron Devices an American chip manufacturer that has its main offices in West Palm Beach Florida. As a very random aside my family vacations in West Palm each year and the route we take from the airport to our hotel passes right by Solitron, which means I have driven past the company many times without even realizing it.
Solitron is in a similar line of business as Micropac Industries which I wrote about previously. It seems often whole industries become cheap as they become out of favor and semiconductors seems to be the out of favor industry currently.
Solitron is a very small company with a current market cap of around $7m, they did $8.9m in sales for the year ending Feb 28 2011 which resulted in $1.2m in net income. The sales broken down by product lines were as follows: (each item is a link to the products on the company website)
Power Transistors 16%
Hybrids 54%
Fuel Effect Transistors 10%
Power MOSFETS 20%
At this point you might be wondering why I'm interested in this stock, for long time readers of this blog it should be obvious, Solitron Devices is a profitable net-net!
Net-Net Overview
Most of the current American net-net stocks have what I consider very low quality assets. What I mean by this is that the NCAV is composed of inventory or receivables with a small amount of cash. This is unlike many of the Japanese companies that trade below NCAV where most of the current assets are composed of cash and marketable securities with small receivable and inventory amounts. As an investor looking to invest with a margin of safety it's preferable to have the composition of current assets in cash verses inventory or receivables because cash can be liquidated for full value in a fire sale whereas the actual realized value of receivables or inventory might not equal the balance sheet carrying amount.
Solitron Devices falls squarely into the second camp, it has the highest quality current asset composition, it's mainly cash and US Treasury bonds. In a future post I will examine the historical composition of the current assets but for now I'm just posting my net-net template.
Why is it cheap?
I believe there are a few factors that are keeping Solitron Devices cheap. The first is the semiconductor industry is depressed as a whole resulting in lower valuations for all companies. The second is Solitron is a very small company with limited visibility and doesn't trade on an exchange. The third is there is some confusing regarding a bankruptcy they went through in the early 90s and the subsequent restructuring process.
Highlights
-Trading below NCAV of $3.80
-EV/EBIT of .63
-P/E of 6.6
-P/CF of 6.72
-EV/CF of .65
-EV/FCF of .939
-$7.69m market cap, $6.34m in Treasuries, $539k in cash
-$14m in tax loss carry forwards that expire in 2029
-CEO compensation tied to EBIT which should only result in a bonus when shareholders are rewarded as well.
In future posts I hope to discuss the following.
-The long term operating performance of Solitron Devices.
-The asset composition and liabilities including all environmental and post bankruptcy liabilities.
-Opportunities for a catalyst.
Talk to Nate about Solitron Devices
Disclosure: Long SODI, I have also been working to acquire more shares.
very cheap stock still should be worth at least 50% more. bought it at 2.20. I am especially pleased the orderbook is increasing while they are decreasing their reliance on Raytheon. If i had a lot of excess cash i would buy more.
ReplyDeleteI have a writeup that is more than a year old but still on gurufocus.
Floris
Floris
Floris, thanks for the comment, I found your excellent post here: http://www.gurufocus.com/news/79017/iinvestment-thesis-on-floris-oliemans-on-solitron-devices-inc-sodi
ReplyDeleteDid you still own Solitron?
Also I would be interested in reading your masters thesis on net-net stocks, it looks fascinating. Shoot me an email if you get a chance.
Yeah definitely still own it. I actually think its the cheapest stock I own. Amazing MoS + Strong FCF yield. This is not something you see often. Began as a pure asset play but IV has been growing at a very decent clip over the past 1-2 years, so no need to sell it. Should yield 20%+ over the next years
ReplyDeleteFloris
thanks for the analysis. Positive FCF, no debt, very conservative management - all looks good. I wonder if the shareholders are going to see that cash - i dont see any history of management paying it out or doing anything with it (which is somewhat of a good thing i guess). Take a look at options balance - at end of FY2009 there were over 467k options outstadning with an average strike price of ~0.76 - thats over 20% of the float. As early as 2005 options were over 29% of the float. There has been nothing since 2009 - have you read anything about this? I wonder if this is some legacy management incentive...
ReplyDeleteOn a somewhat unrelated note - I am following Sangoma Technologies (STC.V) in Canada. Same type of situation - positive fcf, well respected niche product, large cash balance, no debt, conservative management. There is a potential catalyst with new management looking to accelerate new product development. Equity trading as if you get the operating business for almost free (not quite a net/net) Cheers thanks for your posts
Alex
Alex,
ReplyDeleteThanks for the comment, I briefly looked into Sangoma Technologies they look interesting. Do you follow them? I have a few questions about some things on the balance sheet if you don't mind shooing me an email I'd appreciate it.
Nate
I like your analysis. But I find it confusing how you use the terms 'net net working capital' and 'net current asset value.'
ReplyDeleteI find them synonymous. Net net working capital is: working capital, i.e. current assets - current liabilities, less non-current liabilities. Net current assets is exactly the same.
In 'Security Analysis' Graham describes how current assets available for shareholders, i.e. current assets - total liabilities, can be used as an approximation for liquidation value. Liquidation value is calculated by discounting the value of all assets, including non-current, by factors that seem appropriate to the nature of the assets and their marketability.
Mityo,
ReplyDeleteThanks for the comment, I need to revise my spreadsheet terms but I'm in agreement.
I try to highlight two values, net current asset value and discounted net current asset value which is labeled net-net working capital. Discounted ncav could also be considered liquidation value.
The basis for my spreadsheet is actually the worksheet from Security Analysis. What you can't see is that the workbooks that support it have been growing like crazy and my spreadsheets have started to drift from the Graham simplicity to the Peter Cundill net-net template style. I'm hoping to revise and consolidate soon, in the mean time I think I'm going to just change the labels to remove confusion like you mention.
Thanks for bringing it up!