Wednesday, June 13, 2012

Solitron's Share Price Is Too Low To Ignore A Buyback

Nate at Oddball Stocks just did a great post on the dynamics of a shareholder base keeping a stock cheap. I have had thoughts similar to those for a long time. I thought that this one snippet was of particular interest, obvious, and a great point to make (from here):

"I tend to invest and write about companies that have large majority shareholders, and attract value investors, companies such as MicropacOPT Sciences, and Solitron Devices (1,2,3,4).  I'm wondering aloud if part of the undervaluation is that we value investors are our own worst enemies, we are keeping the price low, and if the price rises to close to intrinsic value herd selling begins which drives the price back down.
 What's the solution?  I think in some of these cases the solution to the market valuation/intrinsic valuation gap needs to come from the company itself.  If the shareholder base isn't going to drive the price higher the company needs to be the catalyst.  This could mean a tender for shares, or a dividend, or even going private at a fair value."

A few days ago, Nate posted his letter to Solitron... As he noted of himself, I am not part of, or trying to form a group to cause some sort of change at the company. I am merely a shareholder that would like to see an annual meeting take place, as well as some additional value creation measures, such as a share repurchase. If you would like to see a similar change take place, I encourage you to write a letter to or call the company and in a respectful manner, make your opinion known.


Tender offers and the like can be great ways to increase the intrinsic value ofa corporation. As an example outlined in the article, if Solitron Devices would make a tender offer for any number of shares at a price of $3/share, then the company would basically be buying $9.5 million dollars worth of inventory, cash, and treasury notes, NET of all balance sheet liabilities for a significantly less than $7 million dollars (the market cap of the company)!

Scaled down to individual dollars, for every share repurchased at $3/share, the company would be buying back ~$4.18 in net current assets, net of liabilities...

This would essentially be an immediate, risk free, 40% ROIC! Not only that, but such a move would increase book value, earnings, and cash flow per share- enriching all shareholders. Essentially, if implemented, the company would be buying a stream of capital at whatever rate you think that the company will be earning money in the future- Nate uses 10% (which is significantly better than the treasuries that the company presently sits on). Don't get me wrong, there are a lot of good investments out there, and a lot of bad ones as well, but I am hard pressed to find something that is immediately that good and that close to being a certainty.

If that isn't good enough, did I mention that in above scenario I valued the company's PP&E at nothing? What about the significant amount of Net Operating Losses that don't appear on the balance sheet, but stand at over $14 million dollars? Lastly, we can't forget that the wonderful business that the CEO, Shevach Saraf, has built over the past few decades would remain intact- likely generating sizable returns for the foreseeable future (I am not overly worried about government budget cuts effecting the company in the long run). All these things serve to increase the value of a buyback!

It is likely that a share buyback may constitute the need to alter the language in the company's shareholder rights plan... But, that shouldn't be expensive in comparison to the value that a buyback would create. Additionally, I can't stress enough that when I imply that a company is selling for less than liquidation value, that I am in no way saying or implying that I think the company should be liquidated. I personally hate the idea of anyone shutting down Solitron (or, most companies, for that matter) for a quick investment gain. When looking at the earnings the company is capable of, the loss of jobs in the area, and the service that the company provides to the country, I think that it is too economically viable and vital to be liquidated. That said, it is a fact that the market is presently pricing the company at less than it's liquidation value... as such, the company should sieze this an opportunity to enhance the value of the entity for all shareholders.

It seems fair to me, that the company should start making efforts to aggressively buy back shares at the soonest possible time. As far as I can tell, while there is a restriction on the company paying dividends, there is nothing keeping them from buying back shares. I think that the company looking into a dutch auction share repurchase would be a step in the right direction. So as to not jeopardize the business, I think that a repurchase for up to 500,000 shares, at an opportunistic price of up to $3.50/share would not only be reasonable, but prudent, and value creating.

Disclosure/Disclaimer: I, various members of my family, and our family investment club are long shares of MPAD and SODI. I have no position in or against OPT Sciences. I reserve the right to change my (our) positions at any time. This post is my opinion. Always do a ton of your own research before even contemplating anything that I say, do, write, or so much as think about.

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