3U Holdings a true Ben Graham net-net stock

3U Holdings AG (UUUX.Germany)

Price: €.72 (1/29/2012)

A reader left a comment under my post on the performance of international net-net stocks and mentioned 3U Holdings AG.  It's possible most readers missed the comment since it was in French but thanks to my French/English dictionary from high school and Google Translate I was able to muddle through.  I'm glad I did because 3U Holdings is a really interesting company.  So to the commenter:

Merci de mentionner 3U Holdings, la société est intéressante et bonne valeur mais ne pas parfait.


3U Holdings started off in 1997 as a German long distance carrier.  Through the years the company acquired other telecom companies and grew to service other countries in Europe.  It seems the company stayed in the wireline business with a few brief jaunts into presentation lines and SMS technology.  In 2007 the company decided they didn't want to be in the wireline operations business anymore so they outsourced operations and became an investment holding company.

Then in 2009 the company decided to change strategies again, they felt that renewable energy would be the future so they entered the solar production market.  They have a subsidiary which produces solar vacuum systems and another subsidiary that manufactures solar components.

In summary the company owns a handful of network operator codes in Germany, some SMS companies, a management consulting arm, and finally the solar components pieces.

Investment Thesis

The reason I was interested in 3U Holdings is because the stock is trading below NCAV, it's actually trading below net cash value.

Here is my net-net worksheet for the company:

The first thing that stands out is that this company is trading below net cash value, not by a lot but by a few eurocents.  The next thing I noticed is that 3U Holdings is trading below 66% of NCAV, they're trading at 63.7% of NCAV.  Ben Graham mentioned that buying a handful of securities for 2/3 or less of NCAV and selling when NAV is reached is a very profitable strategy.  The idea is to avoid concentration in just a few of these companies but instead purchase a basket of similar companies all selling below 2/3 of NCAV, 3U Holdings surely qualifies.

The company seems to be prudently selling off old wireline assets and growing their cash hoard.  As with most legacy telecom businesses revenue has been declining from the wireline segment but the renewable energy segment's growth was enough to offset the decline for now.  The company is expecting a boom in 2012 due to Germany lowering renewable rates 15%.  I believe this means that consumers will pay 15% less for energy from a renewable source which should spur growth in the renewable energy market.

What's the risk?

3U Holdings reminds me of another company I looked at recently LICT.  The issue with both of these companies is that their main business is capital intensive and sales are declining.  The good news for 3U Holdings is that they don't have any debt.  The bad news is that the wireline business is sucking up a lot of cash.

In the trailing nine months operations sopped up €11m in cash.  The company received €27m from a sale of discontinued operations but due to working capital changes and capex costs the cash balance only increased by €5m during the year.

As readers of the blog know I'm married to the concept of a margin of safety.  3U Holdings has a very strong asset margin of safety, but I'm concerned about the margin one level deeper at the operating company.  I want to see the company's operations turn cash flow positive or at least as close as possible.  If the company continues to lose money there's the potential that the cash balance could be wiped out and the asset margin disappear.

To me the biggest risk and the reason this stock is selling so low is that there isn't clarity as to whether the cash balance will remain untouched or if operations will burn through it over the course of the next few years.

So what happens next?

I have referenced in previous posts that with a net-net stock the logical thing to do would be to either liquidate or reshuffle operations so the market recognizes the value of the organization.  The reason for this is that if management continues to operate the company in a way that got them to trade below NCAV shareholders would be better off if the company just liquidated than continue down the same path as before.

The good news for 3U Holdings shareholders is that management recognizes there is a problem with the valuation and they are attempting to do something about it.  The company authorized and plans to commence a buyback of 10% of the shares outstanding.  In addition managers have purchased more shares adding to the 28% they already own.

The company also pays out a dividend and the shares currently yield 2.78%.


3U Holdings is a tough stock for me, the discount to tangible assets and cash is enticing.  I'm practicing restraint for now because the company is eating through cash.  I've been easily lured into asset discount situations in the past and then was surprised when a mildly struggling operation turned into a dire situation and ate through my margin of safety.

I think I'm going to sit on the sidelines with 3U Holdings and wait a quarter or two and watch their cash flow statements.  If the cash starts to stabilize I will probably buy a small stake.

Talk to Nate about 3U Holdings

Disclosure: No position

CIBL: spinoff, yes; catalyst, yes; possible five bagger, yes

Company website: http://www.ciblinc.com/index.htm

Price: $625

I want to thank Adam Sues from Value Uncovered for mentioning this stock to me.  If you don't know Adam he's an avid deep value investor who has an interest in the same types of stocks I like.  I reached out to him a while back and mentioned a few obscure names and when he commented he'd already seen the companies and researched them I knew I found a kindred spirit.  Adam doesn't post as often now that he's pursuing his MBA but I would highly recommend adding his site to RSS.  Also I know he's looking for internships, so if you work at a value fund and have a position consider reaching out to him.

Edit: I made a slight change to this post after first posting due to a comment.  I added in net income multiples to the TV Station spreadsheet.  I also changed the final share total.


CIBL is a small holding company that was spun out of LICT (posted about here) a bit over three years ago.  LICT is a wireline company and when spinning out CIBL saddled it with a lot of seemingly random assets.  CIBL has ownership interests in the following, two Iowa TV stations a wireless partnership interests in New Mexico, a loan to a LICT subsidiary and 10,000 shares of a privately held company Solix Inc.

The company has a familiar face on the board, Mario Gabelli of Gamco investors.  Gabelli is a Graham and Dodd value investor, so there is some comfort there that value should be maximized for shareholders.


To understand CIBL you have to understand their holdings, and the structure of the holdings.  CIBL doesn't own the TV stations or wireless partnerships completely, they own interests in these entities. CIBL owns 20% of WHBF and 50% of WOI-TV ABC.

The wireless partnerships are a bit more complicated, CIBL owns 51% of Wescel Wireless which in turn owns a 33% interest in New Mexico RSA #5 and a 25% interest in New Mexico RSA #3.  CIBL also owns a portion of Wescel II which owns 8.33% in New Mexico RSA #3.  The RSA's have a wireless service area of 160,000 people.  The general partner on the wireless interests is Verizon Wireless and the wireless service is sold as Verizon. 

Why is it cheap?

I have what I think are the reasons that CIBL is selling at such a low valuation.

  • Small illiquid stock - Perfectly valid reason, $15m market cap with shares that trade rarely.
  • Limited float - Most of the float is owned by Gamco partners, this ties into the first reason.
  • No SEC filings - A lot of investors pass companies that don't file, CIBL is unlisted but publishes audited financials on their website.
  • Complex structure - CIBL doesn't own any of their assets outright, they own interests in assets, this could complicate a valuation.
All of the reasons for cheapness can be summed up in the statement that CIBL is a very small unknown, under researched company that is hard to buy shares in.  Not many people want to deal with something in the $15m range especially if the company doesn't file with the SEC.  The good news is this leaves a lot of room for enterprising investors.


Usually I will present a company and a valuation before I talk about a potential catalyst.  I'm switching things around for CIBL because the valuation depends on the catalyst. 

In the latest annual report and then in subsequent quarterly reports there is a very interesting quote

"The Company has received, and is reviewing an expression of interest in certain of its remaining telecommunications properties at values in excess of the current trading price for CIBL stock. There can be no assurance that this expression of interest will result in a transaction of any sort, and the Company cannot predict the outcome, timing or any other element of this matter. However, it is possible that the result could be financially significant for the Company."

Let me summarize, someone wants to buy the wireless assets and the price for the wireless alone is greater than the current market cap which includes the TV assets among other things.  Not only is the price greater than the current value of the company it's significantly greater.


In light of the catalyst I want to break down CIBL's valuation into two parts the TV stations and the wireless assets.  The way I want to look at both assets is on a buyout basis since management has stated that they intend to wind down the company if possible.

TV Stations

I did some searching and was able to find that in general TV stations usually sell for 6-10x broadcast cash flow.  Broadcast cash flow is considered cash flow before depreciation, time brokerage fees, and corporate and general expenses.  In addition to valuing the cash flow the value of the real estate is also considered.  So a complete TV station transaction would be 6-10x BCF plus the value of the real estate.  Notice that only the real estate is included not all the TV equipment, this is included in the BCF calculation, all that equipment is required to generate the cash flow.

The annual report and quarterly reports have a small footnote showing a summary balance sheet and three line income statement for both TV stations.  Unfortunately the only values we have to work with are revenue, gross profit and net income.  I put together a spreadsheet to estimate a potential range of TV station values based on what CIBL provides.  I estimated depreciation at 8% and the real estate portion at 10% of PP&E.  Both of these are estimates, 8% is what I've seen for capital intensive businesses, and 10% is based on the fact that TV stations need to buy a lot of expensive equipment to broadcast, it seems that 10% is probably a reasonable estimate for what the real estate is worth.

I put together a spreadsheet based on the 2010 annual report numbers.  Trailing twelve month numbers are in the Q3 report, but I don't know enough about TV to extrapolate what a fourth quarter might look like.  The Q3 numbers appear to be trending a bit better than last year at this time so if anything I'm a bit on the conservative side if the fourth quarter is similar to last year.

As you can see the range I came up with was $5.4m to $13.8m for the interest CIBL owns in the two TV stations.  I find it interesting that the high end estimate is basically the market cap of CIBL.

If you're uncomfortable with my estimated BCF I have multiples of net income in the spreadsheet as well.


As expressed in the company's MD&A there has been interest in buying out a part or all of the wireless assets for more than the current share price.  So when thinking about a valuation it's safe to put a downside on the wireless assets at the current market price of $15m.

I did a lot of Googling and found some references stating that rural wireless companies have sold in the 9x EBITDA range over the past few years.  Like the TV interests breakout we don't have much for the wireless outside of revenue, gross profit, net income either.

I put together a spreadsheet like I did for the broadcast assets and I valued the wireless on two different metrics.  The first was I created an estimated EBITDA, I used 15% of revenue for depreciation, and figured the long term liabilities were debt at 5%.  The second metric was I just did a straight valuation based on net income.  This is a much more conservative approach, but even the lowest net income multiple valuation is higher than the market cap alone.

Here is the spreadsheet:

Other assets

When looking at a valuation there are a few other assets that CIBL owns that need to be valued as well, these include a note to a LICT subsidiary and 10,000 shares of Solix Inc a private company.  For the purposes of a breakup valuation we can probably take the note at face value which is $961,000 as of Sept 30th.  The note has a 5% interest rate and LICT's subsidiary has been paying it down over the past few quarters.

The value of the Solix stock is really tough, the company seems to be decent sized with over 400 employees and 65,000 sq ft of office space in NJ.  I couldn't find much beyond the typical webpage marketing fluff.  Solix could have 25,000 shares outstanding and this is an extremely valuable position or they could have 2b shares and the 10k that CIBL owns is a teeny tiny footnote.  Due to the uncertainty I'm going to just assign a value of zero to this position.

Putting things together

When looking at the pieces of CIBL the absurd valuation is clear, for CIBL to be fairly valued at current prices the TV stations need to be worthless, and the wireless partnerships are valued at 3x net income.

Here is the sum of the parts for CIBL:

An argument could be made that the total company won't be liquidated so an investor won't actually see this sort of return.  I would agree, but CIBL seems intent on paying out extra cash as dividends so in the worst case the return from the subsidiaries is paid out to shareholders while they wait for a liquidation.  I would also say that as CIBL has sold off assets in the past they've returned the entire proceeds to investors as a special dividend, so I'm not sure why a wireless asset sale would be any different.

Other resources

Another way to approach a valuation of CIBL would be to look at the cash distributions from the subsidiaries and value the company on a multiple of cash distributions.  If the company wasn't considering divesting a portion of itself I think this would be the best way to value CIBL.  For anyone interested I put together the cash flows for the last few years into a spreadsheet and have a picture of it below.


CIBL is fascinating in that the obscure structure masks the true valuation.  Management seems to know what the company is really worth and is attempting to sell off pieces, the problem for investors is that shares are hard to obtain.

I recognize that with this valuation I used a lot more assumptions than I normally would, but even in a worst case scenario where the wireless sells for 3x net income I still have a very large margin of safety.  The point of a margin of safety is to protect an investor against errors in assumptions.  If CIBL sells their broadcast for 2x BCF and wireless for 2x net income I would still make a profit at the current price.

Talk to Nate about CIBL

Disclosure: Long CIBL, attempting to accumulate more shares if possible.

International net-net's one year later (performance update)

About a year ago I created a list on Screener.co of all the stocks in ten different countries trading below NCAV that were debt free.  Over the past year I've profiled some of the companies and looked at numerous others.  I felt it would be fitting to go back and look at how all of the stocks that came up on my screener have performed over the past year.


My testing was pretty simple, I put all of the quotes and data into a giant spreadsheet and I typed in each ticker one by one into FT.com.  I used the FT.com 1yr return as my return statistic, I have no idea how accurate this is, but in looking at the data I have a feeling it's generally more right than wrong.

For stocks that I could no longer get a quote I left them blank, and left them out of the average calculations.  I recognize that this could skew the results some. Some of these companies have been acquired, but the potential also exists that others have gone out of business.  I did some googling on a few of them and the ones I looked up fell roughly into the two buckets (bought out, failed) equally.  I didn't want to spend more time on this but if anyone is interested in backfilling this data I'd be interested in the refined set.

I am not an Excel guru so I've uploaded my spreadsheet to Google Docs and attached a link at the bottom of this post.  If anyone is so inclined I would love to know any fun facts from readers slicing and dicing the data.  Also if anyone has the returns for the missing companies I'd love to see that as well.



As I was entering the numbers I had a feeling that the net-net strategy had failed over the past year, as most of the returns I entered were negative.  Consider out of the 214 that started 2011 only 30 had a positive return.  Overall an equal weighted portfolio would have just about broken even although poor it trounced a global ex-US benchmark.  The problem is that since so much outperformance came from such a small set of stocks it's likely an investor would have emotionally sold out after Comwest a $55,000 market cap company quadrupled, although at that point it still almost doubled again.

Here are a few general observations:

  • Canada has the best returns due to a few tiny speculative companies.  Building a position would have required purchasing most of the shares outstanding meaning these returns are mostly unachievable.
  • Germany had a 11% gain which seemed attainable by an average investor.
  • Only 21 companies had a return greater than 10%.
  • Buying only FCF positive or dividend paying firms resulting in a loss but still beat the benchmark.
  • Firms with a greater than 1m (in own currency) market cap returned -13.44%.
  • Firms with a smaller than 1m (in own currency) market cap returned 58%.
  • All of these returns assume a hedged portfolio.
  • Forty companies lost 50% or greater with a number of total losses.
  • The UK had the most "missing" companies.  I hope this is because the UK is more shareholder friendly and management worked to merge or take companies private.


Often I'll come across a blog post, or an article on the internet where the author posits that buying any company below NCAV is a good investment decision.  The data supports that conclusion if the investor buys ALL stocks selling below NCAV since the outperformance came from a very small set.  If someone were to just buy a random set of stocks below NCAV it's likely they would have performed close to the benchmark at best.

Looking through the list and then looking at my own portfolio led me to the conclusion that NCAV is a great starting point but further work needs to be done.  I say this because my own net-net portfolio performed quite well this past year, out of the 13 net-net's I own/owned only one is negative (Titon Holdings) all the rest are positive.  The reason for my good fortune isn't that I happened to buy a lucky handful of net-net's but rather that I looked through a lot and discarded them rather then buying anything, I ensured I had a valid margin of safety and that the business wasn't impaired.

This was a fun exercise, I still plan on hunting through net-net land, but as I mention above it's only a starting point.

Talk to Nate about net-net performance

Link to the spreadsheet (click File->Download Original)

Disclosure: Long 7466, 9814, 9932, ARGO, HYI, TON, VIN

Rella Holdings, profitable company trading below net cash

Rella Holding (RELLA.Denmark)

The following is a guest post by a long time reader who wishes to stay anonymous due to various restrictions.

Market Capitalization: 580mln DKK   
Price: 24 DKK per share
Price to net assets value: 0.36x  
Target Price: 48 DKK per share  Upside: 100%
EV/EBIT: Negative -> High cash position.

Investment Case:

Rella Holding S/A is an investment vehicle that owns 57.5% of the shares of Aller Holding S/A, a Scandinavian publisher with an approximate 60% market share of Scandinavian (Finland, Denmark, Norway, Sweden) weekly magazines. Although profitable (EBIT margins have averaged 6% over the past ten years), the prime attraction of this investment is the high discount to net asset value on the balance sheet. Taking into account the large securities & cash position, the real estate as well as small working capital position implies that Rella trades at only 35% of net asset value.  In other words, a liquidation scenario would yield to substantial (>60%) returns. We believe the main risk of the investment case is continued poor capital allocation by the Aller family, who has the majority of voting rights. Given the exceptionally large discount to liquidation value, we believe that there is a low risk of permanent loss of capital. Although no immediate catalysts are in place (with the exception of continued share buy-backs by Rella Holding A/S), we find comfort in buying 1 DKK of assets for 36 cents. We maintain the mantra that if the assets are in place, goods things will happen.

From an asset perspective, the main attraction is the large cash & securities pile sitting on the balance sheet of the holding. From speaking to the CEO of Rella Holding S/A, we believe the assets are primarily invested in corporate and sovereign debt with sufficient liquidity enabling it to be liquidated within a number of days. Next to a small position in A/R and inventory, Aller Holding S/A also has substantial real estate assets.   This includes the new Allerhuset office building (18.000m2) located in Copenhagen, where a number of the magazines are produced:

The shares are very cheap from a net net perspective, but if the business is burning cash, the value can and will disappear. Fortunately, partially due to its high market shares, the magazine business has remained profitable 9 out of the past 10 years.

The magazine business came under pressure in 2009, due to the financial crisis but cost restructuring has helped return the company to average profitability. The magazine business will likely continue to face pressure from increased internet usage and the advent of tablet pc’s, but we believe that given the high market shares in the Scandinavia it is well positioned to survive declines in circulation numbers.

While well positioned, the decline in its main business also poses the main risk to our investment thesis. This is because the family owns the majority of a-shares which gives it full control over future capital allocation decisions.

We believe that in an attempt to secure the future viability of the business the family could make poor use of the hard assets on the balance sheet and replace them with sub-par long shot investments. Indeed, history has shown that the family has already spent a considerable amount of CAPEX over the past years

Overall, while some of the investments can be explained, especially during 2007-2009, with the investment in the aforementioned Allerhuset, other ventures have yet to prove themselves.  Capital allocation based on family driven investments remains the largest risk to the shareholder of Rella. While this is the main risk, we believe the discount to NAV already assumes substantial value destruction and does not take into account any other more positive alternatives.

Poor capital allocation is always a risk when one is an OPMI (outside passive minority investor), but given the sheer size of the discount to NAV we have tried to ascertain why the market is giving us such a seemingly attractive deal.

Reasons for Cheapness:
  1. Obscure Holding Structure 
  2. Low market liquidity/Capitalization
  3. Relatively poor disclosure
  4. Family owned
  5. No voting rights
  6. No immediate catalysts
  7. Balance sheet investment (vs. Institutional Earnings Myopia)Declining Business 
  8. Poor share price performance becoming self-reinforcing
  9. Listed in Europe  

Overall we believe these are all valid reasons for why Rella is so cheap, but given the large and liquid asset base, the risks to prospective shareholders is minimal. At the current share price, Rella is being offered at a price that offers only a miniscule risk of permanent loss of capital with very substantial upside if any asset conversion event occurs in the future (be it M&A, liquidation, higher payout ratios, going private or a more aggressive use of assets).

Disclosure: Author long, Nate no position

Can a cheap company in a bad industry be a good investment?


Price: $2055 (1/9/2012)

Is it worth buying a dollar for fifty cents if next year that dollar will only be worth ninety cents?  I keep thinking about this and a few other questions as I've been looking at LICT corporation.  I'm sure most readers have never heard of LICT but I'm guessing most have heard of LICT's Chairman and CEO, Mario Gabelli the CEO of Gamco funds.

So what is LICT?  LICT is a holding company filled with a set of regionally diverse RLECs (Rural Local Exchange Carrier), in other words small local telecom companies.  The company owns fourteen different rural telecom subsidiaries that range in size from 800 lines to 7500 lines.  These are small companies in places like the Upper Peninsula Michigan, or Central Scott Iowa, let's not forget Bretton Woods NH.  In 2010 the company serviced 45,680 telephone lines and 17,599 DSL lines.  It seems that the closest companies are a few hundred miles apart from each other and none share the same infrastructure.  This means LICT essentially holds fourteen independent rural telecom companies.

So what's the good news?  I was attracted to this stock for a reason.  There are a few things that caught my eye, the first is that this company is serving an important niche market, when you live in the boonies there aren't exactly a lot of communication options to choose from.  Often cell service is spotty and high speed internet is non-existant.  Besides the somewhat sheltered business model there were a few financial highlights that caught my eye:

  • The company spent close to $300m building their network, they now trade for $56m quite a discount to a theoretical replacement cost. (theoretical because it has been replaced, see Verizon/ATT cell network buildout costs.)
  • LICT earned $450 per share in 2010, TTM they earned $409/sh for a P/E of 5
  • The company has $330 of FCF in the TTM for a P/FCF of 6.23
  • Book value of $70m meaning the shares trade at 20% discount to book.
  • The company is looking to restructure it's hodge-podge of debt.
  • A well known value investor as CEO who is determined to increase shareholder value.
If LICT wasn't in the rural telecom business these stats would make me think that LICT was a Chinese RTO fraud, P/E of 5, P/FCF of 6, trading below book, a catalyst.  All of the raw metrics, and financial figures make LICT seem like an absolute slam dunk investment.  The problem is that as I look at them I can't get the feeling out of my mind that I'm staring down a value trap.

This is a company that is clearly cheap, their main problem is they're resident in a declining industry.  In the past two chairman letters Gabelli states the industry is going the way of the horse and carriage, something I don't disagree with.  LICT has been experiencing modest residential line terminations which have been offset with a slight uptick in DSL, but if we're honest DSL isn't exactly the latest model technology either.  This is like jumping from a horse to a Model T in the age of Ferraris.

The question I mentioned in my first line is the crux to an investment like this.  Is there a big enough discount to a declining value so that LICT can be a good investment?  In one scenario maybe the company will just pay the free cash flow back to shareholders realizing further network investment is pointless.  If the declining free cash is greater than the price paid this could do well.  In another scenario the company could continue to invest yet come to the same terminal point with shareholders wishing for a turnaround the entire way down.

I don't really see any options for this business besides managing the assets they currently have.  It's unlikely that a buyer will emerge and want a bunch of rural telecom companies with a declining user base.   Yet at the same time management realizes the predicament they are in and have been doing all the right things, asset sales, spin offs, special dividends.

At the end of the day I want a margin of safety in my investments, a real actual margin of safety not a facade of safety.  It seems my lack of comfort with LICT is that I can't readily identify their margin of safety.  This is a plain cheap company, but not a safe and cheap company.  I just don't know if LICT will be able to outrun their industry's decline, I sure hope so for their investors sake, but I'm just not so sure myself.

I'd love to hear your thoughts, leave a comment below or email me by clicking the following link.

Talk to Nate about LICT

Disclosure: No position

Bioqual - a beginner net-net

Bioqual (BIOQ.Pinks)

Price: $8.90 (1/1/2012)

Continuing the trend of identifying stocks that have limited or no market visibility but are attractive businesses at attractive prices I present Bioqual.  Bioqual is a medical research company, their researchers are located in three facilities spanning over 130,000 sq ft.  The company researches all sorts of infectious diseases, cancer they also take part in an activity they call animal modeling.  To anyone not versed in medical speak 'animal modeling' means lab conducted medical tests, think lab mice.  This probably isn't the prettiest business but someone has to do it if people want to continue taking pills for various ailments.

The company scientists on staff that do proprietary and published research, the company also does contract research for the government groups such as the EPA, or universities.  The company is awarded contracts that have a guaranteed minimum revenue and a maximum revenue per year.  The company doesn't give much detail in what drives the differences in revenues but my guess is that it's a milestone based system.  The client sets out certain milestones and goals they wish to achieve.  Bioqual will begin tests and as certain phases are completed the client examines the results and determines if it's worth continuing further.  If everything hits according to plan maximum revenue targets can be hit.  Of course this is all speculation on my part, but based on the limited details the company has released this seems to be the case.  I want to note the ranges are wild, for a contract mentioned in the 2010 annual report the minimum revenue is $47k and maximum is $25m.

Investment Thesis

I wanted to highlight a few of the reasons the stock interested me first before diving into the weeds.

  • Stock is trading slightly above NCAV, recent price of $8.90 against a NCAV of $7.96
  • Market cap of $7.8m, EV of $4m
  • Q1 had $1.16 FCF per share, $.30 EPS
  • Q1 ROIC of 13%
  • $4.20 per share in cash
Why is it cheap?

This is the first question I ask myself when looking at a stock.  For most of my pink sheet stocks the answer is found in the obscurity and illiquidity.  I think those are two valid reasons for Bioqual's relative discount but there's a third reason.  As for the first two the company doesn't file with the SEC so information can be hard to find although the company does publish audited financials on their website going back to 2009, and historic financials (pre-2002) can be found in EDGAR.

Within the realm of illiquid small stocks Bioqual does trade fairly frequently.  Looking back at trade history about 500 shares trade at least once a week, sometimes more.  I know this seems like a puny amount but for a lot of these tiny stocks that's considered liquid.  If someone soaked up all of the liquidity for a year they'd own about 3% of the company.  

I think the real reason the company is cheap is due to a contract change that has lead to revenue uncertainty.  For years Bioqual was growing revenue at a steady pace, they only had a slight blip from 2008 going into 2009 and largely avoided the recession.  That all changed in 2010, as I mentioned above the government in many capacities is one of their largest clients.  The government changed the requirements of the contract process demanding an expert in all phases be available at all times.  The problem with this is that experts always need to be available but can't always be billable.  This means that overhead started to rise and at times it wasn't profitable to bid on contracts where in the past it would have been leading to a decline in revenue.

The conclusion I draw from this is that there has been a structural shift for the company, one that isn't going away.  In this light I think it's important to look at some of the past financials, but more emphasis should be placed on the more recent information.  I also think it's silly to look at past EPS and hope for some sort of mean reversion.

Financial information

I first wanted to show my net-net worksheet.  When I first found this stock they were trading below NCAV, but as with many microcaps 900 shares traded hands and the price jumped 13%.  As recently as 12/21/2011 the company was trading below NCAV.  As a tip, if anyone is interested in Bioqual I'd put in a bid in the $7s and let it sit, it wouldn't surprise me if it's filled in a week or two, these shares tend to be very volatile.

The first thing that jumped out to me was the high cash balance, this has been a consistent factor for Bioqual through the years.  I don't think a potential investor can count on a big special dividend paying it back, the company likes to run with a heavy cash balance.

The second thing that popped out at me was that most of the rest of current assets was composed of receivables, and the company had no inventory.  Having no inventory makes sense considering that Bioqual is a service company.  The high receivables make sense considering the government is the biggest client and often there are numerous hoops to jump through to satisfy government billing meaning slow payments at times.

I didn't put a PP&E number on my worksheet because the other assets on the balance sheet are leasehold improvements which I would peg in a liquidation to a very low value.  Maybe Bioqual has some very fascinating equipment but I'm guessing in a fire sale the right buyer isn't likely to emerge, so this stuff would be going for scrap prices.

The good news is the company isn't liquidating, quite the opposite they have a nice track record of profitability so the above mentioned assets can be considered essential for generating a return for the business.  I went ahead and put together a nice spreadsheet for Bioqual that I've posted below.  I added a column between each year showing YoY changes.  I realized that by not including this column in the past I might have missed nuances in the data.  If anyone is interested in the Excel copy of this file email me and I'll send it to you.

The revenue decline is pretty clear in the spreadsheet, I think it's safe to say things will probably stabilize close to the 2011 level.  I also want to note that the company mentioned that capex for the 2012 year will total ~$87,000, a large decline from the previous years.  This will in turn be a one time boost for free cash flow and could lead to a larger than normal year end dividend.

I don't feel like I have much else to say about the company since the spreadsheet contains so much data.  This is a company that has a track record of a very volatile ROE and ROIC yet they are both mostly positive.  The company has been increasing book value consistently since 2008.  The cash balances have been increasing for the past few years, and the number of shares outstanding have been dropping.  All of these things are great signs.  Additionally a relatively modest amount of cash is returned to shareholders each year as dividends.  For an investor who is worried about being "stuck" in Bioqual I can think of much worst stocks to be stuck in.  Consider someone who buys today and can't sell for five years; in five years they'd own a slight bit more of a more valuable company, and would have received about 10% of their purchase returned as dividends.

I think Bioqual is a great beginner net-net stock.  There is a real margin of safety here in the liquidation value, yet at the same time value will be realized by the company's operations not some sort of asset liquidation.  For someone who has never invested in a net-net there isn't as big of a leap of faith to put a few grand into Bioqual because the operations aren't that risky.  The company's contracts are long term and they seem to have a high level of profit visibility at the management level.

With all of this said it probably seems like the perfect stock and at this point you the reader are wondering how much of my money I have invested.  The answer is none, I really like Bioqual, but there are much cheaper stocks on my radar.  If anything I might put in a lowball bid at $7 or so for a small position but nothing more.  While this has the potential for a nice return I don't think it's a dollar for fifty cents.

Disclosure: No position