Performance Technologies, a US net-net with a negative EV

As many deep value investors know pickings have been slim recently.  Acceptable quality net-nets have risen with the market, leaving melting ice cubes with questionable prospects and Chinese reverse merger stocks.  I've been pushed into the land of unlisted and foreign stocks myself, not by choice, but by necessity.  Although the list of net-nets isn't the best I decided I'd rifle through it again looking for hidden gems.  So this brings us to Performance Technologies (PTIX).

Quick Thesis

• NCAV of $1.73
• Tangible book value of $1.90
• EV of -898k
• OCF of $.30 p/s in 2011
• OCF of $.24 p/s in FH 2012
• Last trade at $1.36

Background

Performance Technologies is like many net-nets and near net-nets in that it operates in the semiconductor/hardware business.  The company makes signaling chips and communications related PCI cards.  A chip of theirs might be found in a radar installation or a WAN card.  The company's products all appear to be multi-functional, and their website is clearly geared towards clients who know all the signal and telecom acronyms.  The one common theme that runs through their entire product line is signal processing.  At the most basic level Performance Technologies designs chips and cards that accept a signal (voice, data, anything) and transforms it into a digital message.  The company is located in Rochester, NY, and is listed on the NASDAQ.

The reason I started to look at Performance Technologies is because they're a net-net, if they weren't I probably wouldn't have looked at them.  Here's the net-net worksheet:

Simply put, Performance Technologies is a cashbox with a marginal business attached.  They have a market cap of $15m and they have $16m in cash and securities.

Unfortunately the first ding against Performance Technologies is that while they're a cash box they're a quickly shrinking cash box.  Coming into the year 2009 the company held $29m in cash, and as 2011 ended they had $9m in cash.  Some of the cash was used to purchase investments, but the rest was spent on capitalized software development costs, or purchases of intangible assets.  As a potential investor I'd rather see cash spent on dividends, especially at a business that continues to lose money year after year.

The first question I'm sure readers are asking right now is "why is he wasting time writing this company  up?", the second question is "what's the silver lining?"

The answer to the first question comes in a couple different parts.  The first attraction to Performance Technologies is that while they're selling at a 2.6% discount to discounted NCAV, they're also selling at a 21% discount to NCAV.  The second part of the answer revolves around the company's cash flows.  While the company lost $24m over the past three on an accrual basis the actual cash flows weren't nearly as bad.  On a cash basis the company lost roughly $578k over the past three and a half years.  The income statement tells a very dire tale, but the cash flow statement doesn't quite support the death bed story.  In the last year and a half the company has thrown off $6m in operating cash flow.  Six million in OCF on a stock with a negative EV is impressive.

The answer to the second question is mentioned above, the significant cash flow over the past year and a half.  The company has generated about $.55 p/s in operating cash flow over the last year.  To put the cash flow into perspective, the company has thrown off almost half of their market cap in the last 18 months.

Investment case

The thesis for Performance Technologies is pretty sound, invest at the current price and get some cash and a business for free.  If an investor thinks the business is worth more as a going concern this is a slam dunk, there's downside protection, and a nice potential upside.  The reality is the business could also be like a parasite sucking up all the company's cash until the host is dead.

What's missing from this post is any reference to if the business's potential, or lack thereof that's the missing piece.  If an investor is knowledgable in the signal processing space they might know whether the cycle is about to turn, or if Performance Technologies is a washed up player holding onto the past.  I didn't get that far in my research before moving on.  For me I want a slam dunk cheap company, and while Performance Technologies has great assets, they've shown a willingness to use those assets to support a failing business over the past few years.  There could be a hidden gem of value in this company, but if it's there, it's very hidden.

Talk to Nate

Disclosure: No position