If you are a shareholder I ask that you consider my proposals and if you agree with them please email or write the company letting them know you support my proposed actions. If you do decide to contact the company please remember they are busy running a business so keep your communication short and to the point, please also be respectful. As I outline in the letter Solitron is a good company that the market has trouble valuing.
I also want to note, I am not trying to create a formal shareholder group or association. If you hold a large number of shares (15% or more) please consider that taking possible action with the company could result in the execution of the shareholder rights plan. I hold a small position so my communication does not run this risk. My proposals represent my shares, and my shares alone.
Lastly I want to thank a friend for helping me edit the letter, their advice was invaluable.
Disclosure: Long Solitron Devices
Please do not reproduce:
Nate
Tobik
xxxxxxxxxxx
Pittsburgh,
PA xxxxx
Board of Directors
Solitron Devices Inc.
3301 Electronics Way
West Palm Beach, FL 33407
Re: Proposals to the Board of Directors
of Solitron Devices Inc.
Dear
Sir or Madam:
This
letter is directed to the Board of Directors (the “Board”) of Solitron Devices
Inc. (“Solitron” or the “Company”).
I am and have been a shareholder of the Company for the past two
years. I spoke to Mr. Saraf on the
phone approximately one year ago, and at that time we discussed the Company and
its future prospects. While Mr.
Saraf might not remember my call, this letter is a follow up to some of the
items we discussed.
I want
to thank Mr. Saraf for his hard work and service to Solitron. In the past 20
years he’s taken a company that emerged from bankruptcy and made it well
capitalized and stable. For
example, in the past year the Company earned a 16% return on its invested
capital. That is quite impressive. Mr. Saraf has demonstrated that he is a
capable manager of Solitron’s core business through both good years and bad
years. In addition, I would like to thank Mr. Saraf for being a good steward of
the Company’s excess cash by refraining from making bad acquisitions and for
taking a reasonable salary, two things which I appreciate as an investor.
The
reason I’m writing this letter is because while I certainly realize the value the
Company has created over the years, I don’t believe the market understands Solitron’s
value.
If
Solitron were to undergo an outside valuation, an analyst would look at the
facts of the Company such as its balance sheet and earnings record. A valuation might take into account the
earnings record over various periods of time and consider the stated book value
of the assets, among many other things.
Assets not used in the core business to generate earnings might be
considered excess, such as cash above prudent working capital requirements and
unused real estate. The value of
the earnings stream would be added to the value of the excess assets resulting in
what I consider to be the intrinsic value of the Company.
Please
allow me to apply this to Solitron.
Let’s start with the average of the past five years earnings, which is
$827,400 and apply a reasonable multiple such as 8x this results in a value of
$6,619,200 (the “Earnings Figure”).
Secondly, we would take the excess assets and add it to the Earnings Figure. Please note that the Company’s Treasury
bond holdings should be counted as excess cash. Adding the $6,460,000 of Treasuries to the Earnings Figure
amounts to $13,079,200. This is a
conservative, but reasonable valuation figure that is close to what an outside
valuation might put as the Company’s worth.
The
problem is the stock market value of Solitron ($6,780,000 as of close of
business on June 5, 2012) is significantly and materially lower than the
intrinsic value of Solitron. The
difference in values appears to show that either the market considers Solitron to
be going out of business by valuing it at roughly its cash value, or the market
is giving the Company no credit for holding excess capital.
I
think this market valuation is absurd.
Solitron is a strong and thriving company, well capitalized without any
fear of going out of business, so clearly the market is incorrect. Part of the reason I believe the market
has trouble valuing Solitron is that the Company’s excess capital is masking
the true business value of the Company.
I would like to propose two
items to the Board that I feel might help close the gap between the market
value of Solitron and the intrinsic value of Solitron. Before I list the
proposals, I would like to be clear that my goal is not a short term gain, or
to propose anything that would in any way harm the Company or reduce its
competiveness. I am a long-term shareholder
and I expect to hold Solitron for many years to come.
My proposals to the Board
are as follows:
1) That Solitron initiate a
modest share buyback plan using between $500,000 and $1,000,000 of the Company’s excess cash to buy Solitron stock on the open market.
I understand the Company has a restriction on paying
dividends until the environmental liabilities are settled in 2013, but my
understanding is there are no restrictions on buying back the Company’s own
stock.
The company currently has a 10% earnings yield (defined
as the past year’s profit divided by the market price of the Company.) If the Company used a modest amount of
the Treasury holdings (yielding close to zero) to purchase stock it would
realize a 10% return on invested capital.
I would much prefer the Company re-invest excess cash at 10% by buying
their own shares over re-investing excess cash in Treasury bonds earning close
to zero.
2) That the Company hold an
annual meeting open to shareholders to discuss issues relevant to the Company.
It concerns me that the Company hasn’t held an
annual meeting for the past few years.
In light of increasing litigation in the financial and corporate
markets, I’m concerned the lack of an annual meeting could open the Company up
to potentially expensive litigation and liabilities.
I
look forward to your response to both of these proposals. In the interest of
full disclosure, please be aware that I am making this letter public by posting
it on my website http://www.oddballstocks.com and that I
will be soliciting other shareholders to comment and make their views known on
these proposals. I truly
appreciate the work you are doing at Solitron and believe my proposals will further
enhance the value of the business for all stakeholders involved.
Sincerely,
Nate
Tobik
Disclosure: Long Solitron Devices
Seems a good letter to me. Wondering how they will respond.
ReplyDeleteGreat Letter Nate, I Fully support it (with my tiny position). Thanks a lot!
ReplyDeleteREg
Floris
Nate,
ReplyDeleteThis a great letter. Hopefully, SODI will take the necessary steps to increase shareholder value.
I had 2 questions, hopefully you can shed some light.
1. They mention in their 10K that:"The rate of inflation has not had a material effect on the Company’s revenues and costs and expenses, and it is not anticipated that inflation will have a material effect on the Company in the near future. However, sharp increases in the cost of precious metals has had an adverse impact on the Company’s cost of raw materials." I could not find any explanation as to why. Do government grants/subcontracts adjust for inflation?
2. Their income statement does not show depreciation but it gets added back in the cash flow statement. Do you know if the income is inflated? I know these are audited statements but wanted to get a second opinion as to why this is the case.
Aashiq,
DeleteThanks for the comment, I'll take a stab at both of your questions.
1. Yes, but in two parts. The first is some government contracts have inflation adjustments built in. The second answer is most of these contracts are short enough that if inflation were to ramp up Solitron would be continually signing new contracts at potentially higher rates.
2. This is correct, a lot of companies don't explicitly call out depreciation on the income statement, depreciation is usually included in cost of goods sold.
Nate