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Goodfellow posted a good first quarter. Revenue was down slightly, but management reduced expenses even more, improving margins substantially, from 0.9% net in Q12009 to 1.9% in Q12010. Quarterly earnings per share doubled from 12 cents to 24 cents. Cashflow from operations was positive before changes in non-cash working capital, but substantially negative after. Overall, including investing cashflows, the company used $8.4 million dollars, financed by bank debt. However, this was largely due to a seasonal increase in inventory.
Goodfellow remains good value at its current price.
Saturday, January 23, 2010
Thursday, January 21, 2010
Update on Caldwell Partners (CWL.A)
Caldwell released their first quarter results. The company burned through another $677K, leaving $9.4 million in cash and securities. Revenue increased slightly, but expenses increased more. Management continues to claim this is just them shoring up to take advantage of the recovery. I hope that's true. The company remains good value on paper, but time will tell if this a value trap or not. I continue to hold my shares.
Miranda Technologies (MT)
Miranda Technologies (TSX:MT) is another stock that shows up on our value screens. Miranda "develops, manufactures and markets high-performance hardware and software for the television broadcast industry. Its solutions are purchased by content creators, broadcasters, specialty channels and television service providers to enable and enhance the transition to a complex multi-channel digital and HD broadcast environment." According to the latest balance sheet, MT has $48 million in cash, $23 million in accounts receivable and $17 million in inventories. Property, plant and equipment equal $30 million. Applying some rough Graham mutiples (discussed previously) this gives us a liquidating value of around $85 million.
With the current share price of $5 against 22 million outstanding shares, that's a market cap of $110 million. Total liabilities are $37 million. So in theory you could buy the company outright for $147 million and liquidate it for $85 million. Obviously, this would be a stupid thing to do, but it does indicate that an investment in MT has some downside protection.
However, in the case for MT, the relatively cheap price vs. assets is only a bonus. The primary reason we like MT is that it has been a great cashflow generator. Cash flow from Operations over the past 5 full fiscal years (including changes in non-cash working capital) have averaged $21 million per year over the past 5 years; meanwhile capex has averaged only $3 million. That's a free cash flow of around 80 cents per share, on average, over the past 5 years. So far in 2009 the company remains cashflow positive at just under $2 million through Q3, despite the recessionary environment.
I profess no special knowledge -- actually, make that no knowledge at all -- about the future of MT's industry. Perhaps the recent glut of cash is a one-time thing driven by conversion of existing analog equipment to digital. Probably this is something a more enterprising investor should look into. But since I have a full time job and a family, it's not always possible to spend the time researching details such as this. Instead I assume that if that is indeed the case, that MT is facing terrible headwinds, then this fact is most likely already priced into the stock. After all, it is trading cheap by almost any standard, so the market is certainly pricing in a poor outlook. But, as Ben Graham and his followers have demonstrated time and time again, a diversifed portfolio of stocks that trade cheaply relative to their net asset value and past cashflow can deliver healthy returns. When the forecasted bad news becomes reality, the stock doesn't get hit much, it's already beaten down. But if there is any positive news, then the stock can come alive and increase substantially.
I do own shares in MT. This is not a recommendation that you purchase shares in MT. Please verify all the facts in this article yourself and consult an investment professional before making any purchases. As an amateur investor, I don't know if I have to put this stuff in or not but I figure better safe than sorry!
With the current share price of $5 against 22 million outstanding shares, that's a market cap of $110 million. Total liabilities are $37 million. So in theory you could buy the company outright for $147 million and liquidate it for $85 million. Obviously, this would be a stupid thing to do, but it does indicate that an investment in MT has some downside protection.
However, in the case for MT, the relatively cheap price vs. assets is only a bonus. The primary reason we like MT is that it has been a great cashflow generator. Cash flow from Operations over the past 5 full fiscal years (including changes in non-cash working capital) have averaged $21 million per year over the past 5 years; meanwhile capex has averaged only $3 million. That's a free cash flow of around 80 cents per share, on average, over the past 5 years. So far in 2009 the company remains cashflow positive at just under $2 million through Q3, despite the recessionary environment.
I profess no special knowledge -- actually, make that no knowledge at all -- about the future of MT's industry. Perhaps the recent glut of cash is a one-time thing driven by conversion of existing analog equipment to digital. Probably this is something a more enterprising investor should look into. But since I have a full time job and a family, it's not always possible to spend the time researching details such as this. Instead I assume that if that is indeed the case, that MT is facing terrible headwinds, then this fact is most likely already priced into the stock. After all, it is trading cheap by almost any standard, so the market is certainly pricing in a poor outlook. But, as Ben Graham and his followers have demonstrated time and time again, a diversifed portfolio of stocks that trade cheaply relative to their net asset value and past cashflow can deliver healthy returns. When the forecasted bad news becomes reality, the stock doesn't get hit much, it's already beaten down. But if there is any positive news, then the stock can come alive and increase substantially.
I do own shares in MT. This is not a recommendation that you purchase shares in MT. Please verify all the facts in this article yourself and consult an investment professional before making any purchases. As an amateur investor, I don't know if I have to put this stuff in or not but I figure better safe than sorry!
Monday, December 14, 2009
Chartwell Technology Inc. (TSX:CWH)
Chartwell Technology "develops, markets, licenses, implements and supports gaming applications and entertainment content for the internet and remote platforms. Chartwell’s JAVA and Flash based software products and games are designed for deployment in gaming, entertainment and promotional applications."
Balance Sheet: Current assets after deducting ALL liabilities listed on the balance sheet are $1.19 per share. Most recent share price was $1.15. So the company trades at a slight discount to it's "net-net" value (net of current and non-current liabilities). The current assets are primarily cash. The company has $19.5 million in cash, or $1.06 per share. There is no debt (although there is $234K obligation under capital lease. Relative to the cash balance this is insignificant). Using Graham's liquidation value formula (as discussed here), the liquidating value for Chartwell is $1.13 per share. Liabilities per share are 7 cents. So our balance sheet multiple is (1.15 price per share + .07 liabilities per share)/(liquidating value of $1.13) = 1.22/1.13 = 1.08. There are certainly a lot of very liquid assets backing the current share price and this provides a significant level of safety to the share value. Cash burn is a potential concern, with the company cashflow negative the past 3 quarters. Longer term, operating cashflow has been postive, if somewhat volatile.
Cashflow: over the past 5 years (20 quarters), Chartwell has generated an average of $1.93 million in CFBIT (Cashflow before Interest and taxes) per year. The enterprise value is about $2 million (that's the market cap less net cash). So our cashflow multiple is 2/1.93 = 1.04. This is a very low multiple. Bear in mind that earnings have only been about breakeven during this time. The company has substantial non-cash charges in the form of amortization, depreciation and write-offs and this accounts for the majority of the difference.
Cash usage: The company generated $9.7 million in cash flow from operations before interest and taxes, plus $2.9 million in interest income and a net $7.6 million from share proceeds (primarily from an $11 million private placement back in December 2004, net of share re-purchases over the 5 years). This cash was used to pay taxes ($2.5 million), repay debt ($1.1 million) and make acquisitions ($4.6 million). The difference of around $11.8 million remains as cash on the balance sheet. No dividend has ever been paid and there has not been significant share buyback activity except to offset option activity. Overall the cash usage is neutral. Chartwell has not returned cash to shareholders as yet but at the same time they do not seem to be squandering it either. The 2005 Micropower acquisition resulted in an $870K impairment charge in fiscal 2007.
The industry is highly competitive and subject to substantial legal and regulatory risk. So be forewarned. Still, at the current price, Chartwell deserves a close look by the serious value investor.
Disclosure: I own shares in Chartwell Technology
Balance Sheet: Current assets after deducting ALL liabilities listed on the balance sheet are $1.19 per share. Most recent share price was $1.15. So the company trades at a slight discount to it's "net-net" value (net of current and non-current liabilities). The current assets are primarily cash. The company has $19.5 million in cash, or $1.06 per share. There is no debt (although there is $234K obligation under capital lease. Relative to the cash balance this is insignificant). Using Graham's liquidation value formula (as discussed here), the liquidating value for Chartwell is $1.13 per share. Liabilities per share are 7 cents. So our balance sheet multiple is (1.15 price per share + .07 liabilities per share)/(liquidating value of $1.13) = 1.22/1.13 = 1.08. There are certainly a lot of very liquid assets backing the current share price and this provides a significant level of safety to the share value. Cash burn is a potential concern, with the company cashflow negative the past 3 quarters. Longer term, operating cashflow has been postive, if somewhat volatile.
Cashflow: over the past 5 years (20 quarters), Chartwell has generated an average of $1.93 million in CFBIT (Cashflow before Interest and taxes) per year. The enterprise value is about $2 million (that's the market cap less net cash). So our cashflow multiple is 2/1.93 = 1.04. This is a very low multiple. Bear in mind that earnings have only been about breakeven during this time. The company has substantial non-cash charges in the form of amortization, depreciation and write-offs and this accounts for the majority of the difference.
Cash usage: The company generated $9.7 million in cash flow from operations before interest and taxes, plus $2.9 million in interest income and a net $7.6 million from share proceeds (primarily from an $11 million private placement back in December 2004, net of share re-purchases over the 5 years). This cash was used to pay taxes ($2.5 million), repay debt ($1.1 million) and make acquisitions ($4.6 million). The difference of around $11.8 million remains as cash on the balance sheet. No dividend has ever been paid and there has not been significant share buyback activity except to offset option activity. Overall the cash usage is neutral. Chartwell has not returned cash to shareholders as yet but at the same time they do not seem to be squandering it either. The 2005 Micropower acquisition resulted in an $870K impairment charge in fiscal 2007.
The industry is highly competitive and subject to substantial legal and regulatory risk. So be forewarned. Still, at the current price, Chartwell deserves a close look by the serious value investor.
Disclosure: I own shares in Chartwell Technology
Saturday, December 12, 2009
Still More on Goodfellow Inc.
I found an article at Seeking Alpha on Goodfellow Inc. The author, Jonathon Goldberg, make some interesting points. But I have to dispute one thing he says. Mr. Goldberg writes "The fact that GDL can be bought for less than its current assets (after satisfying all liabilities) has no implications for an investor." At the time of writing of the article, Goodfellow was trading for $7.90 agains net current assets of $8.43 per share.
I believe this fact actually does have some implication to the investor, as would, I believe Benajamin Graham, who devotes an entire chapter of Security Analysis to the importance of net current assets and the implications when they exceed the stock price. In the case of Goodfellow, the net current assets have acted quite effectively as a floor to the stock price. The chart below shows the year-end net current assets per share (split adjusted) for Goodfellow back to 1996 (the blue line). The pink line represents the low price for the stock the following year (for the stock prices I used Nov - Oct -- Goodfellow's year end is August, so by the end of October we can safely assume that the market is fully aware of the net current assets per share). The graph clearly shows that the share price rarely falls below net current assets and when it does (only during the recent market meltdown), it has been a buying opportunity. Please note that the years along the x-axis run backward, from 2009 to 1996. Also note that the 2009 low share price is for the past month and a half only.
Obviously just because this has held in past is no guarantee it will hold in the future. During this period Goodfellow showed a very steady increase in its net current assets and this trend was likely also a contributor to keeping a floor on the share price. But still, the graph demonstrates that the net current assets clearly have some relevance to the investor.
Disclosure: I own shares in Goodfellow Inc.
I believe this fact actually does have some implication to the investor, as would, I believe Benajamin Graham, who devotes an entire chapter of Security Analysis to the importance of net current assets and the implications when they exceed the stock price. In the case of Goodfellow, the net current assets have acted quite effectively as a floor to the stock price. The chart below shows the year-end net current assets per share (split adjusted) for Goodfellow back to 1996 (the blue line). The pink line represents the low price for the stock the following year (for the stock prices I used Nov - Oct -- Goodfellow's year end is August, so by the end of October we can safely assume that the market is fully aware of the net current assets per share). The graph clearly shows that the share price rarely falls below net current assets and when it does (only during the recent market meltdown), it has been a buying opportunity. Please note that the years along the x-axis run backward, from 2009 to 1996. Also note that the 2009 low share price is for the past month and a half only.
Obviously just because this has held in past is no guarantee it will hold in the future. During this period Goodfellow showed a very steady increase in its net current assets and this trend was likely also a contributor to keeping a floor on the share price. But still, the graph demonstrates that the net current assets clearly have some relevance to the investor.
Disclosure: I own shares in Goodfellow Inc.
Thursday, December 10, 2009
More on Goodfellow from a Different Perspective
There's not a lot of analysis out there on some of these smaller stocks, but I was pleasantly surprised to come across Susan Brunner's blog, which offers an interesting and detailed analysis (complete with spreadsheets) of Goodfellow Inc: Part 1 and Part 2 and here's the spreadsheet.
Wednesday, December 9, 2009
Insider Ownership
A lot of value investors place great emphasis on insider ownership. They believe that if management and/or the board of directors are significant shareholders, then the decisions they make will be based on the best interests of all shareholders. They won't, for example, attempt to raise the share price in the short term by engaging in massive share repurchases at a high share price in order to increase the value of their options. They might also be more prudent with capital investments and acquisitions since it is literally their own money they're investing.
But it can also happen that insiders who own significant stakes in the company may not actually have long term share price appreciation as their primary goal. Instead their goal might be simply to fleece the other minority shareholders by taking a bigger piece of the profits for themselves. This could be hidden in various related-party transactions such as leases or consulting fees or exorbitant compensation. It's true that this sort of abuse could be practiced by insiders even if they were not large shareholders, but it's easier to get away with this sort of thing when you're the boss.
I think the best thing would be to judge the past record of a company that has significant insider ownership. If the same owners have been around a while and have done things in the past that have benefited all shareholders, not just themselves, then I would view that as a very positive sign. After all, as psychologists will tell you, the best predictor of future behaviour is past behaviour.
The academic studies looking at firm performance vs. insider ownership are ambiguous. This study from the Journal of Corporate Finance argues that the amount of insider ownership is actually a function of firm performance as well as vice-versa, which just demonstrates how difficult it is to judge whether insider ownership is a good thing or not. The article's appendix includes summaries of past studies done in this area.
Bottom line, insider ownership in and of itself is probably not a bullish indicator while insider ownership combined with a long history of shareholder-friendliness probably IS a bullish indicator.
But it can also happen that insiders who own significant stakes in the company may not actually have long term share price appreciation as their primary goal. Instead their goal might be simply to fleece the other minority shareholders by taking a bigger piece of the profits for themselves. This could be hidden in various related-party transactions such as leases or consulting fees or exorbitant compensation. It's true that this sort of abuse could be practiced by insiders even if they were not large shareholders, but it's easier to get away with this sort of thing when you're the boss.
I think the best thing would be to judge the past record of a company that has significant insider ownership. If the same owners have been around a while and have done things in the past that have benefited all shareholders, not just themselves, then I would view that as a very positive sign. After all, as psychologists will tell you, the best predictor of future behaviour is past behaviour.
The academic studies looking at firm performance vs. insider ownership are ambiguous. This study from the Journal of Corporate Finance argues that the amount of insider ownership is actually a function of firm performance as well as vice-versa, which just demonstrates how difficult it is to judge whether insider ownership is a good thing or not. The article's appendix includes summaries of past studies done in this area.
Bottom line, insider ownership in and of itself is probably not a bullish indicator while insider ownership combined with a long history of shareholder-friendliness probably IS a bullish indicator.
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