Emerson Radio update

Price 19/11/2014: $1,12

Well, Emerson Radio’s results for the third quarter are out and it remains a net-net. Its business is declining as expected, given its position as a retailer of houseware (which most people can get from Amazon or Wal-Mart, or even Alibaba). In fact, this quarter it declined so much, that the company declared $0,00 of EPS. Wow! In fact, it earned about $47.000 in the quarter, a decline from the previous earnings of $698.000. So, nothing new here. The business is almost worthless, but as an upside it isn’t in the loss and it is structured in a way that it would be hard to be in a loss. The company uses a direct to customer model in the majority of its transactions. This helps Emerson avoid investing in inventory and just directing importing a product to a customer. The company is also increasing its licensee profit, although it still remains low. Emerson itself isn’t a manufacturer, so it avoids those fixed costs.

In October, the company distributed a dividend of $0,7, which represented ~$19M. This money didn’t come from the company’s cash pile (which stands at $0,98/share), but from its short investments. And the cash is where this company starts to get fascinating. It generated $2,2M in the six months ended September 30 compared $657.000 for the corresponding period in 2013. Royalties jumped and there was less cash going to building inventories. The black sheep still is its account receivables.

The company is currently disputing with IRS about the dividend Emerson payed March 2, 2010 and to which it wasn’t taxed properly according to the IRS. This litigation has been going on for years now, and not much has changed. The only change is that S&T (the company’s major foreign shareholder) has given $500.000 in restricted cash to Emerson to be used in case Emerson ends up having to pay the taxes. If such a decision is reached, Emerson only has to pay if S&T doesn’t. That doesn’t seem likely. If, however, everything goes the worst way possible, then the company is liable for $20,7M. The current valuation prices that scenario and then some. In the worst case, the share loses $20,7M which would take it to $1,25. Even if Murphy’s law sets in, Emerson should give a little profit.

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