Monday, July 11, 2011

Daxor a gamble on management

Daxor (DXR.AMEX)

Price: $10.17 (7/11/2011)

Daxor is a company trading below net current assets or a net-net stock, it's a curious stock, all of the current assets are liquid and the company pays about a 5.8% dividend.  What's not to like?  Daxor is a classic case of buying one thing and getting another.

Daxor claims to be a medical innovation company, their main product is a blood volume analyzer product.  The blood volume analyzer takes a patients blood and is able to measure it very quickly.  The product seems simple enough and in a growing heath care market the sky is the limit.

The company also has $.88 in earnings per share and a solid slug of marketable securities.  Here is the net-net worksheet.


The net-net worksheet looks great, a nice amount of receivables and $53m in marketable securities, 123% of the market cap.

So what's the problem?  The problem is when digging into the income and cash flow statements we realized the medical devices are a red herring for the real business.  Let's take a look at the latest period income statement.

The company lost $2.17m in continuing operations yet had $.88 a share in EPS, the difference?  All made up in the following two line items: "Dividend income-investment portfolio" and "Realized gain on of securities, net".  Daxor is really an investment company in disguise.  While the medical device division lost $2.17m investments contributed $4.3m in gains.  The effects are more pronounced when taking a look at the full year results broken down by division.


The operating business lost $5.7m while investment income kicked in $10m in income, enough to offset the medical losses and post a positive gain.

When examining this stock rationally an investor might consider why management hasn't shut down its device division and liquidated the portfolio locking in a gain for investors.  I think the reason for this is if the medical division is abandoned Daxor would be considered an investment company and would be subject to SEC regulation.

Investment Portfolio

The 10-k has a section describing the investment guidelines for the company which are:
-Preferred and utility stocks
-Maintain 80% of the portfolio in utility stocks
-Maximum of 15% in speculative issues including short sales
-Use of options to increase income.

The risk for an investor is they are effectively trusting Daxor to manage their investments.  While the past results are satisfactory I'm not sure I want the possible turn around of a net-net hinging on a options trading setup.

It would be much easier to setup their own utility investment portfolio and sell covered calls themselves.  

Summary

I wanted to show in this post that even a net-net has manager risk to a varying degree.  I think there exists a faulty assumption that when investing in a net-net the investor can ignore the quality of management, that's not the case at all.  A net-net investor is relying on management to not make a stupid decision impairing the margin of safety.  


Disclosure: No position in Daxor

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