I’ve recently been adding to my position in Solitron (SODI). The more I revisit the stock, the more value I think there is.
So let’s start this post off with a quick recap. Assuming all options are exercised (and they will be, their strike place is way below today’s share price), SODI has under 2.5m shares outstanding. With its current share price drifting about in the $3 range, that gives it a market cap of ~$7.5m.
For that $7.5m, you are getting 3 things.
- A cash pile of $7.6m dollars (the company has no debt), which actually understates their cash pile per share because I’ve used diluted shares but given them no credit for cash from option exercise (small adjustment though).
- A business that did almost $750k in ebit last year and has averaged ~$1m in EBIT over the past five years.
- Has an off book asset of over $14m in NOLs that expire through 2031 (we will discuss these later).
You can look for holes to explain why the company is trading for (basically) less than cash despite a history of profitability. They’re tiny. They’re controlled. They include this quote in their 10-K every year
However, due to the level of current backlog and projected new order intake (due to the status of the general economy and the shift to Commercial Off–The-Shelf (COTS) by the defense industry), the Company might operate at breakeven or at a small loss during part of the next fiscal year.
But I think the basic reason is market inefficiency- this is a tiny, unglamorous company with a strange shareholder base due to a past bankruptcy. If there was ever a place for market inefficiency, this is it.
I think there’s even an interesting twist- Nate over at oddball stocks sent a letter to the board and is organizing an “activist” campaign to get the company to repurchase shares.
I fully support his campaign, with one caveat:
I’m not sure if share repurchases, even at these depressed prices, are the best use of shareholder funds.
The reason is the company has a lot of NOLs. Those are extremely valuable, but there’s no way the company in its present form could make use of all of them.
Given that, it makes sense to do an acquisition if the company can find a complementary business within their wheelhouse. If they had an excellent capital allocator at their helm, buying stocks or bonds could make sense. Even hiring a real estate expert and purchasing income producing real estate at a decent price could make use of the NOLs. One real interesting idea- acquiring a closed end fund at a discount to NAV and using the NOLs to shield tax distributions.
The reason is pretty simple: because of their tax NOLs, SODI can be the best owner of businesses. Profit generating small businesses are worth much more to SODI than they are to other random owners.
Now, I’m not recommending SODI go out and buy anything and everything. But I do think it would be a shame to waste those valuable NOLs. If they got desperate for ideas, I’d be happy to recommend several small businesses that would make excellent acquisitions at these prices!
Disclosure: Long SODI
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I too, support a buyback. At a minimum, a few million dollars. After that, acquisitions are a fair use of capital.
Something to consider:
If they buy something at, say, 15x earnings, and are never able to grow the earnings, the buyback would be a better deal. Even though the company may not be able to use all of it’s NOLs (or, if it does, it will be stretched out for a while), it will be able to use a good chunk of them.
http://ragnarisapirate.blogspot.com/2012/06/solitrons-share-price-is-to-low-to.html
There almost no way that an acquisition could do as well as a share buyback, especially due to the crazy ROI that would essentially be achieved on year one with a share buyback. The above link outlines the value created due to the discount to assets.
Whopper,
I wrote them a letter reiterating Nate’s points: http://valueprax.wordpress.com/2012/06/21/my-letter-to-the-board-of-directions-of-solitron-devices-sodi-activism/
I don’t think they’ve demonstrated any particular talent for capital allocation so far so I’d be hesitant to recommend they do an acquisition, though I get where you’re coming from.
Do you have any suggestions on acquisition targets you’d like to share for other shareholders to consider who might be interested in communicating further with the board (hint, hint)?
Also, I’m sure you’ve seen Nate’s posts on concerns about SODI being a fraud. Did you have any thoughts on this?
I’ve been thinking about increasing my position as well.
What if SODI determined the PV of its pre-petition liabilities (as discussed in note 2 in the recent 10-K) and negotiated a lump-sum payment that eliminated that line in the BS?
Part of me wonders if that could achieve a positive outcome far more quickly than a share re-purchase program on such an illiquid stock where management and top shareholders already own 65% of it…
And once you get that liability eliminated–I’d be more likely to re-frame SODI as a take-over target by a strategic acquirer who could make use of its expertise in a niche market and substantial NOLs.
You mean the $128K on the balance sheet? That they’ll have paid down by next year?
I am confused.
I’d zeroed in on the third sentence of note 2A on page 32:
“At February 29, 2012, the Company is scheduled to pay approximately $1,002,000 to holders of allowed unsecured claims in quarterly installments of approximately $7,000″.
Why not determine the PV of that liability and negotiate a lump-sum payment instead of the current 35-year payment plan?
They basically have an interest free loan due to that line on the debt side. If they are getting a loan of money that is so cheap, why would they want to pay it back sooner, rather than later?