Lately, I’ve been talking about stocks that are, by the standards of this blog, relatively huge. Both RAS and ATPG (analyzed both ATPG bonds and ATPG equity) have market caps of ~$250M+ and balance sheets in the billions. Considering I normally focus on stocks with market caps under $50m and balance sheets under $100m, those companies are giants!!! Plus, their balance sheets are super complex, with non-recourse assets, multiple publicly traded securities, complex financing, etc. So today, we go back to the heart and soul of this blog and look at a simple microcap with a <$15m market cap and ~$20m balance sheet: Micro-pac (MPAD).
The great thing about getting “back to the basics” and writing up a company like MPAD is that the write up is relatively simple and straightforward, so expect a quick and simple post!
PS- Micro-pac was suggested to me by a reader (feel free to give me your suggestions! The smaller and more obscure the better! I promise I will try to look into them all!), so thanks for the suggestion!!!
The company designs, manufactures, and distributes hybrid microelectric circuits, solid state relays, and a variety of other products that I have no idea what they are or what they do.
Normally, that would make the company a quick pass for me. But that quick pass is because not understanding what a company’s products are normally means cutting edge high-tech products. That’s not the case with Micro-Pac. Micro-Pac’s products enjoy long life-cycles (meaning low risk of sudden technological obsolescence), and are small but critical components of a broad range of aircraft and navigational instruments.
Their products are also relatively commodity based. The company notes that their are at least two competitors selling all of their products, and the business enjoys margins in the high single digits to low double digits, which are normally indicative of a lack of competitive advantage.
However, the lack of competitive advantages doesn’t mean MPAD can’t earn decent ROIC. After adjusting for excess cash, ROIC over the past year comes in over 30% because the company does a great job of keeping invested capital low. And this isn’t a one time fluke- ROIC over the past five years has consistently come in at 20-25%+, and the company has enjoyed operating profits in each of the past ten years.
So that’s enough for the quick overview of Micro-Pac. Again, the business is small and relatively simple. You’re welcome to dig into further if you’re interested in the stock (in fact, I encourage you to), but the broad overview is enough for our purposes.
So let’s move on to valuation. MPAD has averaged ~$2.5m worth in EBIT over the past five years. Given the company is doing so at very nice ROIC, that $2.5m is likely worth ~10x EBIT, which would imply an EV of $25m.
With the market cap standing today at ~$14m, that would imply a significant jump in market cap from here. However, this simple analysis actually understates MPAD’s value. Like many of the company’s discussed on this site, MPAD sits on a significant net cash position (GTSI is another great example). After backing out a special dividend they just paid out, MPAD has just under $10m in cash with no debt outstanding. That equates to almost $4 per share versus today’s stock price of $5.25!
So if we add up the $10m in net cash plus the $25m in operating value, we’d come out with a target market cap of $35m, or $13-14 per share versus a current price of $5.25.
That seems about right to me. But you’ll notice in my disclosure at the end of this post that I haven’t bought yet, despite significant upside and great downside protection.
First, I need to free up some cash. I’m going to have an article coming out soon discussing how difficult I’ve found it to sell cheap and buy cheaper. I’m sure many of you have experienced the same thing.
However, there are also some company specific concerns. Sales are highly dependent on government funding for space and military products, and both of those appear on the way down as the U.S. deals with its huge debt load. Indeed, revenue and backlog are both down pretty significantly year over year.
Finally, the company is majority owned (>75%) by an 82 year old German investor. In other words, the chances of any activism taking place here are nil. Share ownership by management outside of the German investor is basically non-existent. Such large ownership by one shareholder combined with small mgmt ownership has to be concerning for any investor as it raises plenty of questions. A few quick samples- What happens when the shareholder dies? Does the company get bought out or does management run wild, using the excess cash for huge bonuses and crazy acquisitions? Etc.
But those concerns seem more than made up for by today’s low prices. Assuming MPAD stays around today’s prices, I’ll likely add some over the next week. Normally, I don’t post until I actual own the stock, but since I’m going to need to sell something to add MPAD, it wouldn’t kill me if you beat me to it.
Disclosure- Long GTSI, RAS, ATPG bonds. Likely to add MPAD in the near future.
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