Winland Electronics a case of hidden value laying in plain sight

It's not often that a value fund piles into a stock with a $5m market cap.  Especially a fund with billions under management, but that's exactly what's happened with Winland Electronics (WELX).  The small company was noted in FRMO's latest quarterly remarks (read here).  FRMO, a part owner of Horizon Kinetics a multi-billion dollar asset manager purchased 15% of the company, a strange acquisition given FRMO's size.  The second largest shareholder after FRMO is another value investor named Thomas Braziel, the manager at B.E. Capital. (note: If you're looking for some interesting reading this interview with Braziel is a must read.)

Between FRMO, Braziel, and Matthew Houk (an associate of FRMO) 41% of the company's shares are spoken for.  

Apparently more than a few FRMO shareholders reached out to Murray Stahl (one of the company's two executives) and asked why a $390m market cap company making a roughly $500k investment, and was it even worth their time?  We know this because Stahl took the time to write about FRMO's Winland Electronics investment in the company's Q3 report.

What Stahl pointed out in his letter was two things.  The first was that at one point FRMO was a small company as well and has grown and they believe Winland can do the same.  The second was that the company sells a well known niche product that has very unique characteristics.

Winland specializes in monitoring systems.  They sell monitors to detect smoke, water, chemicals, temperature, and vehicles.  They've built detection devices for most anything that can be detected.  The products are not expensive and are potentially an easy sell to clients.  They're a form of cheap insurance.  If a company's building is flooded the company could incur hundreds of thousands to millions of dollars of losses from damages or outages.  It's easier to purchase a small sensor to detect water and mitigate the flood rather verses dealing with the effects after it has happened.

When one looks at Winland's product page it's easy to visualize how each of their sensors could protect a company against a catastrophic scenario.  Even though the probability of a catastrophe might be remote it's an easy decision to purchase a relatively inexpensive sensor that could detect an issue before it becomes a catastrophe.

Besides selling monitoring devices Winland also sells a subscription software monitoring solution that Stahl believes holds a lot of potential.  The company doesn't break out their sources of revenue, but subscription software is a good business model.

If the business is interesting but the company is overvalued there is not much to research.  But given Stahl's recent purchase it's likely that value is lurking at Winland, and I decided to take a closer look.

The company used to file with the SEC before delisting in 2014.  Before their delisting they had a history of losses before Braziel took an outsized position and gained control of the company.  Braziel moved the company from continued losses to sustained profits.

They earned $272k in 2014 compared to a loss of $2.6m in 2013.  Their book value increased from $1.3m to $1.6m between 2013 and 2014.  The company is clearly on better footing, but one needs to ask "where's the value?"

Winland is trading for 19x earnings and 3x book value, not exactly a deep value investment.  But a closer look reveals more.  Of the company's $5.3m market cap a little more than 20% of it consists of cash.  Ex-cash the company earned $272k on $538k worth of equity, for an incredible 51% return on equity.  What's even more encouraging is the company has expanding net margins.  They earned $31k on $964k in sales in Q1 2014, and in Q1 2015 they earned $129k on $936k in sales.  At this run rate they could potentially generate $600k in earnings in 2015 and ex-cash would trade for a 6.8 times earnings.

An additional sweetener for investors is the company's net operating losses carry forwards of $6.3m that expire in 2022.  There is a valuation allowance against them so these are an off balance sheet asset worth $1.64 per share, or more than the current price of the stock.

When an investor looks slightly beyond the financial statements it's easy to see why Winland Electronics is an attractive investment.  For the current price of $1.43 an investor is buying $.33 per share of cash, a business that has turned around, is growing, and has the potential to generate upwards of $.15 per share in earnings this year plus $1.64 a share worth of NOLs.  On top of all these things is the fact that the largest shareholders are value investors with an interest in maximizing shareholder value.

In the interview with Braziel linked to above he mentions that his best investments require digging beyond the initial financial statements.  I find it very fitting that the company where he is Chairman needs to be analyzed in the same manner.  There is value in Winland if one does a little bit of digging.

Disclosure: No position.