Introducing Solitron Devices

Solitron Devices (SODI.OTC)

Trading at $3.40 (5/31/2011)

I am going to try a different format for this post, instead of bombarding readers with an epic post about one company I'm going to break it apart over a few days with possibly a small post mixed in.  I'm hoping this will accomplish two things, readers will find the information easier to digest and the posts will spur deeper thinking which can be captured in a later post.

So without further ado I present Solitron Devices an American chip manufacturer that has its main offices in West Palm Beach Florida.  As a very random aside my family vacations in West Palm each year and the route we take from the airport to our hotel passes right by Solitron, which means I have driven past the company many times without even realizing it. 

Solitron is in a similar line of business as Micropac Industries which I wrote about previously.  It seems often whole industries become cheap as they become out of favor and semiconductors seems to be the out of favor industry currently.

Solitron is a very small company with a current market cap of around $7m, they did $8.9m in sales for the year ending Feb 28 2011 which resulted in $1.2m in net income.  The sales broken down by product lines were as follows: (each item is a link to the products on the company website)

Power Transistors        16%
Hybrids                        54%
Fuel Effect Transistors  10%
Power MOSFETS       20%

At this point you might be wondering why I'm interested in this stock, for long time readers of this blog it should be obvious, Solitron Devices is a profitable net-net!

Net-Net Overview
Most of the current American net-net stocks have what I consider very low quality assets.  What I mean by this is that the NCAV is composed of inventory or receivables with a small amount of cash.  This is unlike many of the Japanese companies that trade below NCAV where most of the current assets are composed of cash and marketable securities with small receivable and inventory amounts.  As an investor looking to invest with a margin of safety it's preferable to have the composition of current assets in cash verses inventory or receivables because cash can be liquidated for full value in a fire sale whereas the actual realized value of receivables or inventory might not equal the balance sheet carrying amount.

Solitron Devices falls squarely into the second camp, it has the highest quality current asset composition, it's mainly cash and US Treasury bonds.  In a future post I will examine the historical composition of the current assets but for now I'm just posting my net-net template.

Why is it cheap?
I believe there are a few factors that are keeping Solitron Devices cheap.  The first is the semiconductor industry is depressed as a whole resulting in lower valuations for all companies.  The second is Solitron is a very small company with limited visibility and doesn't trade on an exchange.  The third is there is some confusing regarding a bankruptcy they went through in the early 90s and the subsequent restructuring process.

-Trading below NCAV of $3.80
-EV/EBIT of .63
-P/E of 6.6
-P/CF of 6.72
-EV/CF of .65
-EV/FCF of .939
-$7.69m market cap, $6.34m in Treasuries, $539k in cash
-$14m in tax loss carry forwards that expire in 2029
-CEO compensation tied to EBIT which should only result in a bonus when shareholders are rewarded as well.

In future posts I hope to discuss the following.
-The long term operating performance of Solitron Devices.
-The asset composition and liabilities including all environmental and post bankruptcy liabilities.
-Opportunities for a catalyst.

Talk to Nate about Solitron Devices

Disclosure: Long SODI, I have also been working to acquire more shares.

Special Report on cheap Japanese stocks

10/10/11 - UPDATE - New lower price, for a limited time 50% off the Special Report and 20% off the list of ten cheap Japanese stocks.  

I have been researching Japanese stocks for a while now and I've put together two reports highlighting some of the cheapest Japanese stocks available.

The first report contains 10 extremely cheap Japanese stocks.  The report includes:

  • Four net-net stocks trading at or below cash value.
  • Six stocks trading for less than cash per share.
  • All ten stocks are profitable and have ample free cash flow.
  • All ten stocks pay sizable dividends.

The cost of the report is $25 just $2.50 per idea.

For a limited time this report is only $20 or $2 per idea.

Click the Buy Now button and after your payment has been processed you'll be sent a link where you can download the PDF of this report.

If you want a deeper analysis of a few companies listed in the first report the second one I have created is for you.  The report details three stocks which are all net-net stocks. This means the stocks are selling below the value of their current assets minus all liabilities.  Put another way the company's working capital is greater than their market cap.  These are truly cheap stocks that provide a margin of safety.

The stocks are cheap on an asset basis but they are also profitable and have ample free cash flow.  The stocks all trade at or less than cash per share.

Each stock pays a dividend so investors are able to get a return now while they wait for full value to be realized.

This report is similar to other writeups on this blog such as the post about Dainichi (1 & 2), or Daiwa, or Ryoden Trading, the difference is this report goes deeper than any post on the blog.

The report includes company specific research on items such as:
  • A basic overview of the company
  • Share specific data
  • Share trading information
  • Asset composition trends
  • Liability trends
  • Margin analysis
  • Cash generation ability
  • Free cash flow analysis
  • A valuation matrix showing how much each stock could be worth.
I have also included two other sections to help investors who are interested in the stocks:

  • An overview of net-net investing and why buying at a current asset discount gives an investor a margin of safety.
  • A section with ideas on how to hedge yen exposure.

The cost of the report is $100
Now for a limited time this report is 50% off only $50!! 

Click the Buy Now button and after your payment has been processed you'll be sent a link where you can download the PDF of this report.

Ask Nate a question about the Japanese net-net special report

Dainichi Redux

I last talked about Dainichi here on May 6th when I evaluated the margin of safety and how I felt that cash from operations wasn't keeping up with earnings and could be destroying the value of the company.

What I didn't know at the time was that they would be reporting their full year results on May 8th two days after I did my post, and after reviewing the 2010 full year statements my view on them has changed.  If you remember I was hung up on two things, the quality of earnings as flagged by my accruals worksheet, and the lack of positive cash flow.

The first thing I wanted to take a look at is how the accruals have changed now that we have more data. The result is that accruals have gone negative which means that the company's accrued expenses have been dropping, both on the balance sheet and in earnings.  This is a good sign, the reason for the spike on my last look at them could have been a seasonality issue but I'm not sure.

While accruals have dropped and make me feel a lot better about the quality of earnings and the quality of the balance sheet I still care about cash flow, and free cash flow.  The following is a picture of their full year cash generation.
What a difference a quarter makes!  Instead of being a net consumer of cash Dainichi was a net generator of cash over the full year 2010.  Free cash flow clocked in at 2111 or ¥117 per share giving Dainichi a price to cash flow of 5.21 or a free cash flow yield of 19%.

The latest financial statements changed my mind on Dainichi, while I liked the company before I was worried that my margin of safety might be destroyed, seeing that this wasn't the case once the fourth quarter statements came out I went ahead and bought a few shares.

Disclosure: Long Dainichi

Perennial net-net Audiovox

Audiovox (VOXX.Nasdaq)

Trading at $7.70 (5/18/2011)

Often when searching for net-net's in the US one name keeps reappearing in the lists, that's Audiovox.  Audiovox has been mentioned a number of times by Jonathan Heller at Cheap Stocks, and in an interview he did with Geoff Gannon for the Investors Question podcast Jonathan proclaimed that Audiovox might be a permanent net-net.  This isn't the most reassuring thing to hear as an investor in Audiovox, I've held them for about a year now and with their annual report recently released I thought I'd revisit them again.

To give a little background on Audiovox back in 2005 they were a cell phone manufacturer with $1.8b in sales yearly.  They sold off their cell phone division and decided to reinvent themselves in the accessory business.  Since moving into accessories margins and revenue have climbed steadily.

In addition to Audiovox being a net-net they are a rare beast in that they are a profitable as well.  When examining most net-net's I will evaluate the balance sheet, and bolt on earnings power.  I don't think that sort of valuation applies in Audiovox's case, so I'm going to take a look at the balance sheet, then their earning power separately.

Asset Valuation

Here is the net-net template for Audiovox

The first thing that stands out is that the company's balance sheet is made up mostly of inventory and receivables.  While receivables and inventory are a large percentage of ncav they've remained fairly steady for the past five years, and carrying large balances isn't uncommon in the industry.

On an asset basis Audiovox is trading about 30% ncav and about 10% above discounted net working capital.  This is a nice discount but nothing to write home about.  On an asset basis Audiovox isn't the most compelling net-net I've ever seen.

Earnings Valuation

I think the earnings aspect of Audiovox is the most compelling aspect of this investment, and it seems the earnings picture is getting a bit stronger.  In fiscal year 2010 the company earned $1 per share, and is trading at a P/E of 7.7.  The company also had CFO of $1.40 per share which puts them at a P/CF of 5.5.  Both of these are low metrics especially given that the company is on the mend with regards to earnings.

While sales grew 2% from 2010 to 2011 cash from operations grew 35% and capex shrunk 40%.  Free cash flow defined as CFO minus capex is $1.26 a share.

While I usually don't put much weight on management forecasts because no one can know the future the forecast for Audiovox is intriguing.  They acquired Klipsch a car audio manufacturer at the beginning of March for cash and some debt.  Management has stated that Klipsch will be accretive to earnings immediately and help boost revenue by 29%.  Management also expects EBITDA to be $42m up from $10.7m in 2010.

So what do we have, a company trading at a slight discount to ncav and an improving earnings picture.  All seems great right, well there are always risks involved.

-The company has been trading at a discount to ncav for the past few years, the market hasn't recognized it's value then, it might never recognize intrinsic value.
-The acquisition of Klipsch could destroy shareholder value and leave the company saddled with debt.
-Audiovox has a long history of rolling out products like FLO TV that fail in the marketplace, maybe the discount to ncav is warranted with the lack of product execution.
-It might be hard to realize the full ncav in a liquidation, inventory could be junk, and receivables might pay up at a discount.


I'm not really sure how to fully value Audiovox, I am taking a 50% discount to ncav or basically cash value and then applying an earnings multiple, here are a few scenarios.

$5.38 ncav +
10x earnings = $10 + $5.38 = $15.38
10x CFO = $14 + $5.38 = $19.38
15x FCF = $18.9 + $5.38 = $24.38

I'm not sure if any of these values will be realized, but I'd be happy with even the worst case.  As with all investments time will tell.

Talk to Nate about Audiovox

Disclosure: Long VOXX

Buying a company for less than net cash?

Daiwa Industries (6459.Japan)

Trading at ¥392 (5/16/2011) Approx $255m market cap

I remember articles in the WSJ back in 2009 mentioning that some small cap companies in Japan were selling for less than cash on the books and wondering how it was possible.  I also have read accounts of investors buying companies in the US during the depression for less than cash, but I never imagined that I would stumble upon one myself.

I present to you Diawa Industries a Japanese maker of refrigerators and freezers.  I found Daiwa by using the screener looking for negative enterprise value stocks that were profitable.  Finding some of these issues isn't difficult, it's just knowing where to look, and what to look for.

The refrigerators that Daiwa sells are used in grocery stores as well as restaurants.  Some of the discount can be explained by the company in their December report.  They state that consumers are eating out less, and that due to economic conditions their customers aren't replacing the appliances as quickly as in the past.  The rest of the discount can be explained by examining their financial performance.

Asset Valuation

The most important item when evaluating a net-net is the quality of the assets.  In the case of Daiwa the asset makeup is very investor friendly.  The cash minus all liabilities exceeds the market cap by a nice margin.  In addition they don't carry a large amount of inventory or receivables.

I have my net-net worksheet below, all figures are millions of yen except the share specific figures.

In addition to a high quality asset makeup the company has been growing it's asset value while shrinking liabilities at the same time.  In other words book value has been growing.

One aspect that's slightly troubling is that the company keeps building up their cash hoard with no apparent way to spend it, or no desire to return it to shareholders.  This is common in Japan, so not a large cause for concern.  Japanese companies are notorious for ignoring shareholder interests.  The stock yields 2.51% but that's not a terribly high dividend for such a cash rich company.

Operations Valuation

What makes Daiwa interesting is that while it's not difficult to find companies trading below ncav that lose money, finding a net-net that's profitable is very uncommon.

From Dec 2009 to Dec 2010 Daiwa earned ¥3519m or ¥68 EPS.  In addition they also had FCF of ¥6477 or ¥127 per share.  On an operating basis alone the company is trading at a P/E of 5.76 and a P/CF of 3.08.  Both are very cheap metrics on a stand alone basis.  Some of this can be explained by the fact that both cash flow per share, and net income have been declining steadily for the past five years.

The company has a 58% gross margin which has remained pretty constant for the past five years.  The operating and net margins tell the story of why this stock has been steadily declining.  The operating margin was 21% in 2006 and has dropped to 18% as of December 2010.  The net margin was 17% in 2006 and has dropped down to 12% as of the most recent statements.

I don't have any sort of superior insight to know if the margin contraction will end soon, or if it will continue until they begin to lose money.  Even if the margin continues to shrink I think an investor has an ample margin of safety, the company is still growing book value and is profitable.

The last thing I want to highlight is the accruals worksheet I created for Daiwa, it tells an interesting story.  To give some background the accruals worksheet aims to capture balance sheet and income statement accruals.  An accrual is money that is set aside for a future event.  So the company might sell a refrigerator and book the sale as revenue, but the payment might fall in a different reporting period, this would be accrued revenue.  The second type of accrual is a balance sheet accrual, which would be something like accrued payroll expenses.  Money is set aside in one period to be paid in the next.

Here is the worksheet

What we have in the case of Daiwa is balance sheet accruals declined over the period examined while cash flow accruals came in at 22%.  This is a little high for a cash accrual which means the earnings quality isn't as high as might be desired.  At times poor quality earnings can indicate fraud or potential misuses of capital.  I don't see any other warning flags at this point and another metric cash paid for taxes is reassuring.  The cash paid for taxes comes in at 33% which is very close to the standard corporate rate in Japan.


While it seems like a no brainer to buy a profitable company for less than cash value there are always risks associated with any investments.  The first risk I see with Daiwa is that their margins continue to decrease due to a structural problem in the business.

A second risk is that the cash pile is squandered by management on an acquisition or venture that loses money.  Japanese companies don't have a very good track record of capital allocation, and to presume they might correct it in the future is presumptuous at best.

The company employs 1773 people who generate about $198k per employee in revenue per year.  1773 seems like a lot of people to generate $352m in sales.  The company could be very personnel heavy which is common in Japan.  They could continue the trend of growing the payroll at the expense of shareholder value.

The stock has an average volume of 56k shares traded daily.  The stock can only be bought in blocks of 1000 shares, so around 56 transactions take place each day.  To build a $100k position it would take two trading days at 25% of the average daily volume.

It is nearly impossible for a shareholder to agitate management to change and become more shareholder friendly.  Investing in Daiwa means hoping that eventually the market will recognize the valuation imbalance and will correct it.

The stock has lost money four out of the last five years with most losses deep in the double digits.  A shareholder needs to gird themselves for potentially more losses before intrinsic value is realized.

Closing Thoughts

I think Daiwa Industries presents a compelling opportunity.  On an asset basis alone the stock looks like a very good buy, but the assets aren't the only thing an investor is buying.  Because of the low probability of asset conversion it's important to evaluate the operating business as well.  While the operations haven't been growing they are still solidly profitable and reinforcing the margin of safety.  I think stocks like Daiwa are very rare finds.

Talk to Nate about Daiwa Industries or investing.

Company website

Disclosure: As of this post I do not own Daiwa Industries, although I am considering initiating a position in the next few days.

Another profitable Japanese net-net

SPK Corporation (7644.Japan)

Trading at ¥1249 (5/10/11)

SPK Corp is an aftermarket auto parts wholesaler and distributor.  The company is located in Osaka Japan which is south of Tokyo and unaffected by the earthquake.  The company did have a sales office in Sendai, the status of that office is unknown.  The company either manufactures or sources parts such as clutches, transmission assemblies, gaskets, electronics among other items.  SPK also sells aftermarket heavy machinery parts for agriculture and construction equipment.  Overall this is a very boring business, a nice thing about boring businesses is they are easy to understand.  SPK also has a very nice English website that has a nice product catalog, and links to sites where you can actually buy the products.  The procurement sites are all in Japanese, so if you wanted to buy a gasket and examine the quality you will need to use a translator or read Japanese.

-Sales increased YoY from 2009, the company hasn't experienced a loss in the last five years through the midst of the recession.
-The earnings quality is pretty good, balance sheet accruals at 7% and cash flow accruals at 2.8%, both good measures.
-Cash taxes paid on EBT comes out to a 36% effective tax rate which is in line with Japanese taxes.
-Cash from operations has been positive for the last five years as well.  During the same time period cash balances increased in all years except for one.
-Cash and book value have been steadily growing.
-EV/EBIT of 2.93
-Dividend yield of 4.2% for 2012 paid in two installments, mid year and end of the year.


Here is my net-net worksheet for SPK:

To determine the quality of earnings I ran the numbers through my accrual worksheet:

Historic statements can be found on the numbers for SPK are accurate, will give a five year view, because of this I didn't enter the historical income statements into my own spreadsheet, why duplicate the work.  Get the statements here.

To figure out what a good value is I'll examine a few scenarios.

Scenario 1: Asset value realized
The stock is trading below NCAV, very close to discounted net working capital, cash is 62% of share price.  If the company rises to it's net current asset value it would be a 36% increase in share price.  Another measure to consider is that if the shares trade up to book value it would be a 60% increase in share price.  I think there is more value than just rising to NCAV or to book value, the company is profitable and cash flow positive.

Scenario 2: Earnings value + cash 
If we take a 10x multiple on the current year earnings and add in the cash:
10x ¥124 = ¥1240 + ¥775 = ¥2015 per share a 61% increase from the current price.

Scenario 3: 2012 earnings + cash
If we put a 10x multiple on the EPS estimate management provides in the annual report:
10x ¥141 = ¥1410 + ¥775 = ¥2185 a 75% increase from the current price.

Scenario 4: Earnings grow to 2007 level, asset value never realized
If the market never recognizes the value of the assets and earnings grow to their 2007 level and the multiple stays the same it would be a 25% increase in share price from here.

-Tied to the auto industry which is at a practical standstill after the earthquake, Japanese car factories are idled or operating at low capacity.
-The company is a small cap stock, with a market cap of approx $100m.
-Due to being a small cap stock it's also pretty illiquid, with an average of 4k shares trading a day.  The block size for SPK is 100 shares or about $1600 per block.  The shares do trade almost all days, I was able to get a fill for my shares somewhat quickly after I placed my order.
-Building a $100k position at 25% of the daily volume would take about 7 trading days.
-The company earns a low ROIC, low ROE, low ROA, and has a large balance of cash that slowly is expanding, it could trade at a discount to NCAV for a long time.
-In the last five years the shares performed terribly:
   2006: -17.37%
   2007: -33.28%
   2008: -6.61%
   2009: 4.2% (only gain)
   2010: -8.29%

Talk to Nate about SPK Corp or anything else on your mind.

Disclosure: I am long 7466 SPK Corp

Additional resources:
The company's website
The latest annual filing in English

Evaluating the margin of safety on Dainichi Co Ltd

Dainichi Co Ltd (5951.Japan)

Trading at ¥632 (5/6/2011)

Dainichi is a Japanese company located in north western Japan, and was unaffected by the recent earthquake.  The company manufactures oil heaters along with a few other minor business lines.  The company introduced a vaporized oil heater in the early 70s and have expanded their product line using their original technology.  They've since expanded to coffee roasters, and garbage processing machines.

Dainichi is undeniably cheap, it's trading below NCAV and below discounted net working capital.  Dainichi is very cheap on a balance sheet basis, but I'm not sure that the balance sheet tells the whole story.  The danger with investing in a net-net is that even while the company is cheap the operating business is doing something to destroy the margin of safety.

So let's take a look at a few factors, first the net-net worksheet:

We can see that NCAV is ¥828 or 31% above the current price, while NWC is 2% above the current price, even the cash per share is 65% of the current market price.  From a balance sheet perspective there is an undeniable margin of safety, the company is trading below liquidation value.

Having a fortress balance sheet is great but for a company to survive it needs to either be break even or turning a profit, to evaluate that we take a look at Dainichi's current income statement.

From an income statement perspective the margin is safe, the company is profitable earning ¥79 per share.  The company only lost money once in the last five years which is a pretty decent track record considering the economic shape of Japan.  So far the margin looks intact, great balance sheet, and great income statement.

I have always liked the expression "The income statement tells how the business is doing, the statement of cash flows tells if management is lying, and the balance sheet is a snapshot in time."  I feel the line about the cash flows tells the biggest story with Dainichi.  So the company posted a profit, of ¥79 per share, but cash flow from operations was a negative ¥347 per share, what's going on?

The first thing I did was plug in the numbers into my earnings accrual worksheet.  The higher the percentage of accrual earnings the lower the quality of earnings.  Stated another way high quality earnings have cash flow behind them, low quality earnings are mostly booked items with little to no cash flow following.  So what do we have for Dainichi?  Here's the worksheet:

An amazing 56.94% of the earnings are accrued earnings without any cash flow.  This is quite concerning, I'm not saying the company is a fraud, it's just that they have pretty aggressive revenue recognition policies.  How else do we know this, well accounts receivable ballooned ¥9938bn in the latest period.

So knowing that earnings quality isn't very strong let's look at the relevant cash flow items for the current period.

The cash flow statement lies bare the fact that the margin is not safe.  In the latest period the operating division burned through ¥6262bn.  In addition the company also spent ¥1013bn on investments and ¥421 on dividends and share buybacks.  It seems crazy to me that they're still paying a dividend and buying back stock, but as noted elsewhere, Japanese companies seem to work with different corporate interests.

So what does this all mean?  For me the big takeaway is that while the balance sheet looks great, and the income statement seems to strengthen the investment case of Dainichi the cash flows just aren't there to support the numbers.  In addition there is a real concern that the cash outflows at the company could lead to either financing the operational cash flow gap, or insolvency.  

I didn't expect this post to turn out into a walk through on how I evaluate margins of safety in net-nets, I expected to just write up another Japanese stock that looked decent.  But as I went through the story the statements told was so clear I couldn't help but write my post to show the destruction of safety.  To just throw out the net-net figures and say it's profitable without delving into the reality is dangerous.  Sometimes the market is very wrong about stocks, but other times the market is right.  In Dainichi's case I think the market is correct to discount their share price, if the company keeps performing at the same level they might not exist in a few years.

Disclosure: I own none of the issues mentioned in this post.


Why not all spinoffs are plated in gold

I love researching and investing in spinoff investments, usually there is a lot of money to be made in spinoffs.  A new management is incentivized to improve performance and usually a company living inside of another company isn't usually operating at it's most efficient.  That said not every spinoff is worth buying, I've noticed a trend on blogs touting every spinoff as a buy.  While an investor can find some good bargains picking through potential spinoffs I believe it always pays to read the filings closely, missing a few small lines can mean the difference between a great company, and a potential train wreck.

I was recently reading the filing for the spinoff that Cablevision is doing of AMC Networks.  The idea initially attracted me, AMC owns rights to shows but doesn't have to own the infrastructure to distribute the shows, rights are not capital intensive, building out cable to thousands of households is not.  So I was reading the filing and the following lines caught my eyes in the section Reasons for Distribution.

Cablevision’s board of directors has determined that separation of our businesses from Cablevision’s other businesses is in the best interests of Cablevision and its stockholders. The potential benefits considered by Cablevision’s board of directors in making the determination to consummate the Distribution included the following:
• to enhance the credit profile of Cablevision by accessing its RMH subsidiary’s additional debt capacity to effectuate a reduction of Cablevision’s indebtedness, thereby providing Cablevision with greater financial and strategic flexibility to pursue acquisitions following the Distribution; and
• to increase the aggregate stock price of Cablevision and the Company relative to the pre-Distribution value of outstanding Cablevision stock, so as to allow each company to (i) issue equity in connection with acquisitions on more favorable terms and (ii) increase the long term attractiveness of equity compensation programs, in both cases with less relative dilution to existing equityholders.

Let me translate this to you, Cablevision wants to load up AMC Networks with debt, so Cablevision can refinance at lower rates.  In addition they also expect to be able to issue more shares as two separate companies, instead of one.

So I have to ask myself, why would I want to own a company where the controlling shareholder wants to increase leverage and issue more shares diluting shareholders.  It appears that spinning off AMC will benefit the Dolans (the majority owners of Cablevision, and soon AMC Networks) but not shareholders who decide to go along for the ride with them.

If you have any thoughts on this spinoff please leave a comment, I'm interested in hearing other investors  opinion on AMC Network.

Talk to Nate about this stock.

International net-net #8 Ryoden Trading Ltd

Ryoden Trading Limited (8084.Japan)

Trading at ¥503 (5/1/2011) $279m market cap

Ryoden Trading is a Tokyo Exchange listed Japanese manufacturing company that has two main product lines, FA Device Systems, and Semiconductors.  The FA Device Systems is made up of controller systems, industrial mechatronics, and apparel manufacturing devices.  Controllers are things such as sequencers and servos.  Mechatronics is composed of robotics used in factory processes, an example of this might be a robot that puts a wheel on a car in an assembly line.  The apparel manufacturing builds machines used in the manufacture of clothes in Asia.

What's attractive to me about this company is that they are and have been profitable.  Investing in a company below NCAV while they are earning a profit ensures both a margin of safety and improves the chances that the company will pull through and realize it's intrinsic value.

I should note, I used the balance sheet data for my worksheet, the actual balance sheet is available in Japanese and can be translated via Google Translate or a native speaker.

-The company is trading at 503 which is slightly more than the 432 NWCC value and well below the NCAV of 904.
-Trading at 44% of book value (book value of ¥1122)
-Profitable with earnings of ¥24.63 per share.
-Management has set a goal of ¥240bn for fiscal 2012 with a 3% operating profile ratio (operating income).  If management can execute at this level net income would be in the range of ¥4320bn or ¥100 EPS.
-The company is trying to expand overseas, they plan on 20% of revenue being derived from overseas in the next year.  Additionally they are opening a site in Germany in June due to increased demand from the Eurozone.
-The company's earning power was significantly higher in the past, so expecting them to execute on their 2012 plan isn't unreasonable.
-The company is debt free and cash flow positive.
-3.5% dividend yield.
-The company only sustained minor damage in the earthquake.
-The company has a nice website in English with summary results, and historical figures.

-80% of their business comes from Japan which has a negative economic outlook.
-The business only has a 3% operating margin, and a .63% net margin.
-Shares need to be traded in 1k blocks, with an average volume of 32k, meaning an average of 32 trades take place a day, not very liquid.
-Mitsubishi Electric Corp is a 37% owner of the company.
-Japan is notorious for lack of shareholder activism, if investing in Ryoden don't expect a hedge fund to petition for a share buyback, or increased dividend.

Why it's cheap
-The company experience a sharp drop off in earnings two years ago depressing the price.
-The company is smaller leading to a limited news flow, and not much
-The profit margin is pathetic, for every ¥1000 in sales they earn ¥6.

In summary this is the type of net-net that offers good downside protection as well as the possibility of good returns.  If management is able to increase earnings towards their goal of ¥100 EPS and using their last 5yr average P/E of 12.05 results in a ¥1205 share value or 139% higher than where it's at currently.  In addition to this there is ¥382 in cash per share.  The problem is there is no assurance the company will ever execute at that level, or that the market will recognize the results.

Company website
Financial information
Exchange information (financial releases are found here under TDnet)

Talk to Nate about this stock.

Disclosure: I don't own any of the issues list in this post.