Titon Holdings is a company that manufactures and sells vents for windows. The vents are simple devices that let homes breath. I have to make a confession, no matter how many times I've looked at Titon's website and talked to Britons I still don't understand why a window vent is needed. I've accepted the fact that people outside the US (and Canada?) need little vents, whereas our windows open completely.
Titon sells most of their vents in the UK, they also have a joint venture in South Korea. The South Korean joint venture's results have been a roller coaster with some years adding to Titon's bottom line, and other years subtracting.
How bad is it?
When I last profiled Titon they had a NCAV of 56p and a discounted NCAV of 36p. This time around the values are a bit lower:
Since last year the company's NCAV has dropped from 56p/sh to 52p/sh, is Titon the proverbial melting ice cube? A melting ice cube is a company or a net-net where company operations slowly chip away at a margin of safety. Cash burn slowly eats into the buffer investors have on their initial investment. If investors hang around long enough they could witness the stock move from being a net-net to being a cash burning company with negative equity. An unfortunate feature of investing in net-nets is one comes across a lot of ice cubes. If I had to venture a guess I'd say probably 70% of companies that qualify as net-nets also are in some stage of melting, some much quicker than others.
For me the art of investing in net-nets is separating the wheat from the chaff, finding the companies that are likely to see better days ahead where a real margin of safety exists, and isn't in a state of decline.
As I mentioned above what made me re-evaluate Titon was when they went from cash flow positive to cash flow negative. I put together a small spreadsheet showing how revenue, various profitability metrics, cash, and current assets have changed over the past six semesters. I looked at the past six semesters as it captures the company from the bottom of the crisis to now:
Readers will note that while revenue has remained somewhat steady nothing else has. One semester net income shot up 58%, and the next it dropped 51%. It's worth noting that even in past semesters when the company recorded an accrual loss they had positive cash flow from reducing inventory investment and tightening up on collections.
The profitability trend is concerning, but that's not what concerns me the most. What's most concerning is the trend in the company's cash position. The company has steadily spent down their cash reserves over the past year and a half as operations have deteriorated. What's even more concerning is management has insisted on continuing to pay the dividend even though they expect the second half of 2012 to be the same or worse than the first half. If management is to be taken at their word we could see cash drop below £2m and NCAV drop into the 48p range.
I'm split on what to do, part of me wants to just sell my holding, take a loss and move on. Another part of me is a hopeless optimist thinking the company will turn around in a semester and all will be well. I recognize patience is key to investing, yet at the same time being patient with an incorrect investment is foolish. I would rather be patient with companies that don't have a shrinking margin of safety. I'm going to continue to think about this position, but I think I'll end up selling at a loss. Investors are often too quick to sell winners and too patient with losers. In typing this post I recognized I've probably been too patient with Titon and it's time to move on. Thoughts are always welcome!
Talk to Nate about Titon Holdings
Disclosure: Long Titon Holdings at the time of this post