Look what the cat dragged into NCAV

This is my first post where I explain why I bought a company’s stock. Well, fuck it. I’ve been doing this for sometime now, and am still fine-tuning my NCAV radar. When it catches, I’m exhilarated. I dig, I search for net-nets and not many come to the surface. Many times being a Graham investor seems a lot like fishing. I’m an awful fisherman. It seems as if I use radioactive poop as bait and so I spend hours and hours under the sun doing nothing but looking to the big horizon curve. Nothing. Plain simple deadly boredom. And then, bam!, something appears. This of course has happened before, just to realize that there’s a reason for a NCAV to be a NCAV. Well, not Emerson Radio. Emerson used to be big and the brand famous. It used to dominate the radio market, when having a radio was considered a window to the world. Multiple characters have come and gone by Emerson, and Emerson keeps humming.

It has introduced itself into so many business lines, that naming them would be tiresome. Radio clocks, TV sets, air conditioning and even defibrillators. In 1973, Emerson, then a subsidiary of National Union Electric, sold its licensing rights to Major Electronics. From 1976 to 1977 and after shedding its previous business to focus on phonographs, Major renamed itself to Emerson Radio and moved to New Jersey. Emerson used to manufacture its products in the US. After 1980, not one of its products is. Mostly, it imported (and still does) from Asia, assembled in New Jersey and sold in the US. It seems that the history of the company is written in the low-end of the market, always competing at lower prices. Oh yeah, and Emerson adventured into PC’s (typical). That was a multi-million loss for the company that eventually dropped that line of products. That takes us to the present, which is entwined in an extremely complicated fashion.

Grande Holdings, a Bermudas company, acquired a controlling stake in Emerson (~56%) and then entered into liquidation. The High Court of Hong Kong appointed Fok Hei Yu (also know as Vincent Fok) and Roderick Sutton to manage Grande, and as such manage its controlling stake in Emerson. Both are part of FTI Consulting. So, the directors of Grande no longer hold the power to control Emerson, FTI does. In March 20, 2013, the liquidators informed Emerson that it was its goal to sell Grande’s stake. Now, the liquidators have partnered with Grande and a Grande’s creditor to pursue a restructuring proposal in which Grande is re-listed in the Hong Kong stock market. Under this proposal, Grande retains Emerson. Worst case scenario? The situation drags on and Emerson’s value is wasted.

Why am I interested in Emerson? Well, I was interested in September, but didn’t invest. Shortly after, Emerson informed the market that it would pay a special dividend of $0,7 per common stock. The stock price jumped to fully price its NCAV level and I lost interest. Then, this happened. After the dividend, the stock plunged, as investors felt that all of the bounty had been properly stuffed in their pockets and that now the stock was worth a lot less. Well, yes, but investors exaggerated.

As of June 30, the company reported $78M in current assets. This minus the dividend ($18,99M for 27M common stock), results in $2,01 in NCAV. And mostly is in hard cash. From a balance sheet point of view, the stock is highly under-priced.

However there are some worries with operations. Although the company is profitable, the effects of Wal-Mart stop buying two microwaves from the company have dented significantly in Emerson’s income, which is in a declining trend for years.

The major warning to look for: the company reported in its cash flow statement a loss of ~$12M in accounts receivable for the three months ended in June 30. A year ago, it reported a loss of ~$6M. Why would it report a loss in accounts receivable? Clients didn’t pay. That is troublesome and has the potential to seriously undermine the company.

According to the cash flow, the company isn’t eating into the cash pile to sustain its operation. A little activism investing: Lloyd Miller has a 5,6% stake in the company as of August 29, 2014 (a reduction from 7,2%). Mr Miller appears to have taken the opportunity to wind down his position in the price surge of the special dividend. His actions seem to corroborate the idea that he also sees the stock as being a NCAV and is pressing for the board to sell the company and distribute the money to its shareholders. I’m not banking my money on Mr Miller’s actions. I don’t need to. I bought a company worth ~$54M for ~$30M and in the meantime got a share of the ongoing operation that is profitable.

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