Sunday, March 1, 2009

My 2nd letter to Dataram (and their response to my first)

A few weeks ago, I was pleasantly surprised to open my mailbox, and see an envelope that had the Dataram logo printed in the return address area. Being initially shocked that the company had even responded to my letter asking for a share repurchase, I was not excited about the response:



Here is my response to their letter:

Members of the Board,


Thank you for your response to my letter regarding a share buyback; I sincerely appreciate John Freeman taking time to address my concerns about our company.


While I understand that the business is attempting to grow, please be mindful that ‘business growth’ alone does not necessarily increase shareholder value. As owners of Dataram, we should want for the company’s capital to appreciate at stupendous rates on a per share basis. As this is the case, pursuing sales growth or acquisitions without analyzing the cost of the capital that was used to facilitate said actions can be wealth and value destroying. This effect is only exacerbated when the company’s common stock is trading at roughly 2/3 of its cash less debt; indicating that either the stock is incredibly undervalued or the market as a whole has no faith in the presently charted course of growth through acquisition.


Prudent capital allocation is a goal in which I am sure that you and management are aware of, given the fiduciary duty to yourselves and all other owners of the company. While it is my hope that the ‘Try and Buy’ program is a great success, it is imperative to put the company’s cash to the most profitable use possible. Over the past year, we have seen our reserves of cash actually go down! On the face of things, shareholders would have been better off had the company invested all available capital in Treasury Notes and ceased to manufacture, market, and sell memory. A share repurchase at present valuation levels, provided that the shares are retired and not granted as options, would be a great way of unlocking value by increasing long term cash flow and earnings on a per share basis.


In addition to a share repurchase program, I ask the board to consider putting the company up for sale. If the company were sold as a whole at its current market valuation, the buying entity would have effectively been paid over $5 million dollars in cash to assume next to non-existent liabilities and all future cash flows of Dataram. When coupled with the patents, industry relationships, and reputation for quality that Dataram has developed over the years, Dataram is quite attractive to a host of companies who would be willing to pay a premium for the company.


Thanks,


-Jeffrey Moore



I suggest and hope that any interested parties also write the board in support of putting the company's cash to good use.

Obviously, I am long DRAM.


4 comments:

Mark Perkins said...

they could be just stubborn about selling the company. I think that happens a lot. HLYS was right around cash per share and they declined a good buyout offer when buyers were actually looking.

Jae Jun said...

Good letter. Hope they write back. Would like to read what they say.

Mike DeGraw-Bertsch said...

Interesting letter, it's good to see that they responded to the first one you sent.

I'm curious why you think a share repurchase program would be more advantageous than a partial liquidation (though I'd prefer a complete one at this point). In 10 years of operations, they've generated a paltry net income of $7 million. Further, in my reading of their 10-Ks, it doesn't look like they're including depreciation in their income statement: I think there's a $10M discrepancy between the actual earnings ($7M net over 10 years, minus $6M paid in dividends) and the reported retained earnings ($17.6M in 2000, $8.3M in 2008). That's a change of MINUS $9M, compared to supposed overall profits of $1M.

That would mean that, including depreciation appropriately, the company has actually lost $9M in the last 10 years from operations.

(I'm really hoping I've misread something, but the 2002 10-K is the big sticking point for me--there's $8M in depreciation reported in the cash flow statement, but I really don't think it made its way into the income statement)

So while a share repurchase would make sense to me if the company actually stood a chance of long-term profitability, it really feels like they're going to just burn through all their cash and head for the dustbin. They may be attractive for a buyout at their current market cap, but with $0 in goodwill, why even bother (except for their cash on hand, I suppose)?

All that said, I'm curious if you think I'm missing something, or if there really is a compelling reason for DRAM to stay in business.

Thanks!
-Mike

Jeff said...

Mike,

I don't see where you get that they are not depreciating their assets: http://finance.yahoo.com/q/cf?s=DRAM&annual

Depreciation was over 300K in the last year.

I want a share repurchase because it would increase all ratios on a per share basis, and would put the cash to good use (after all, it would be getting a dollar for 70 cents.) I am not as in favor of a dividend, due to the forced taxes that the owners of the company would have to pay.

Goodwill does not neccessarily make a company attractive for a takeover, especially if it is not generating cash. If the company can stay cash flow neutral, it should bring more than 15 million in an all cash offer.

I think that the company makes a great product, and don't really want them to liquidate-just start allocating capital in a commonsensical manner!