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%
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!
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.