Wednesday, July 29, 2009

The Virtue and Patience of Owning a Business

As any business owner will tell you, it takes a lot of time, patience, and a strong stomach to last long. Paul Sonkin, the manager of the Hummingbird Fund (plus a few others) and his stake in Dewey Electronics takes this description to a whole new level. Sonkin is a co-author of one of my favorite books on value investing and Dewey makes military electronics and commercial snow making machines.

Earlier in the month, in an SEC filing, Sonkin became a beneficial owner of more than 10% of Dewey Electronics. Formerly, he had acquired more than 5% of the company towards the end of 2005. In that time, there have been anti-war sentiments, reduction of troop levels in areas of conflict, and a recession (which has to of eaten into the snow machine business; despite global warming :D).

The company does own it's 49,200 sq ft manufacturing facility that sits on 90 acres of land; free and clear, which is no doubt on the books less than it is worth. On the books for a mere $1 million dollars, it has been depreciated since 1981. Here is a view of it:


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The company entered into a contract to sell 7 acres of their land for 205K, which sits across the interstate from their main facility, in May of 2008. While the sale of the land is subject to the approval of the Highlands Council and other state agencies (thanks to the Highlands Water Protection and Planning Act). When I called the tax department of the borough to find out what the property's tax assessment was, they told me that is was assessed in 2005 at just over $5.4 million.

The company does have a pension liability, which seems to be significantly underfunded (though, not by a large nominal amount of dollars) since the company is expecting a growth rate of 7.5% for the assets of the liability. This estimate is quite rosy, since the company has a ROE of 1.75% for the past year-which would suggest that the company is either overestimating their pension returns or that they are in the wrong business, since they could more than quadruple their ROE by managing their equity as if it was a pension fund!

To further put this into perspective, Sonkin's position in the company is just over 127K shares, or, put another way, is roughly ALL of the shares that have traded hands in the past 15 months! Obviously, Sonkin has to be sure of his bet, due to the liquidity issues at hand. This, in addition to the under performance of the investment in respect to the broader market; at some point that has take a toll on your investors and investment ego...

Another interesting point about Dewey, is that the company derived over 80% of last years revenue from 2 products; a 2 and 3.5KW generator for armored military vehicles. While I am sure that their products are top rate, it seems to me that military equipment is something that has the potential to change a bit more than I like... granted generators and guns are pretty basic, and once you get some that work, they work for a long time (the Colt 1911A was used as the standard sidearm of the army for many decades and is still one of the best handguns ever designed; the AK-47 has a similar story); though, this company will have to be mothballed or evolve like crazy if they lose their contracts.

Personally, I would love to be an owner of the business- at least, if I could own more than 1/2 of the company. Right now, I don't understand what kind of catalyst there could be to bring the stock to full value, though, the prospect of their land, less all liabilities being worth more than the stock is pretty enticing at the moment. From where I sit, the company should either liquidate, which I doubt will happen (due to management owning a ton of shares) or it will keep on keepin' on with it's low levels of ROIC. Due to low/spur-attic income levels and crazy credit markets, I highly doubt that much could be done to monetize the company's real estate without the company ceasing to exist-but I have been wrong on this sort of thing before.

Disclosure: I have no position in Dewey/Do your own research before buying any sort of security I talk about/This is not investment advice/Yadda Yadda Yadda...

1 comment:

macedonia384 said...

Oh man, I'm a sucker for super cheap crap businesses :P I'm going to have to dig into this one. Thanks!