GSI Group: Lasering In on a Dirt Cheap Net/Net Stock

GSI Group Inc. (GSIG) is a net/net stock. The company make lasers, scanners and other products for the medical, chip and aerospace markets. Here is a basic rundown of the company's numbers as of 10/24/2008:

• Sector: Technology
• Industry: Lasers-sys/comp
• Price: $1.90
• P/E (trailing): 5.14
• Net Current Asset Value: $7.10
• Percent of NCAV: 29.87%
• Price/Tangible Book: 0.25 (In it's 9 year history it has never been under 1)
• Price/Sales: 0.29 (It has not been under 1 in the past 7 years)
• Price/Cash Flow: 1.51 (by far the lowest in its industry)
• Debt/Equity Ratio: 0.00
• Market Cap: 79.06 Million
• Cash: 183.27 Million (This may change because they acquired Excel Technology for $347.5M in cash this past quarter)
• (Trailing 12 Month) EBITDA: 35.94M
• EV/EBITDA: -2.90
• Z-Score: 3.05
• Piotroski F-Score: 7

(Both previous tests just show that the company is not in any danger of going bankrupt).

GSIG shares are dirt cheap and insiders and value investors seem to agree. Two insiders purchased over $100,000 in stock during the month of August. This is the first time any insiders have bought stock this year.

The company also has quite an impressive list of Institutional Holders to include Royce & Associates, Third Avenue Management, Renaissance Technologies, NWQ Investment Management, and Paradigm Capital Management.

Additionally, of the 16 Institutional holders listed, 11 of them added to their positions in the quarter ending on 6/30/2008.

Furthermore, deep value investment firm Howson Tattersall Investment filed a SC 13D on 9/24/2008. The company has also been buying back stock in each of the past 4 quarters.

This is a comment from their 2007 Letter to Shareholders on stock buyback:

Our exceptionally strong balance sheet permitted us to repurchase over $11 million of GSI stock, taking advantage of favorable prices and limiting dilution from our employee equity compensation program. Our board has recently authorized an additional $25 million for our stock repurchase program, bringing the total authorization for the repurchase program up to $40 million.

Evaluating the industry, there are 33 companies that fall in GSIG's industry (accordings to Zacks.com). Of the 33, only 15 have positive EBITDA and net income. Of these 15, GSIG has the lowest trailing P/E, the lowest Price/Cash Flow, the lowest Price/Book of .42, and the lowest Price/Sales.

GSIG also recently acquired Excel Technology in August for $347.5M in cash. This move attempts to double their profits and expand market share. All I could find on Excel's history is that they increased their Book Value Per Share every year over the past 10 years, always had positive earnings, had 0 debt, and had a Return on Capital of 10.4 this past year. There is only 1 analyst covering the stock right now that I can see on MSN Money. He has predicted earnings of .14 for FY08, a decrease of 75% from FY07.

However, FY09, although hard to judge that far ahead, is predicted to have earnings of .54, a 285% increase and .09 higher than FY07 earnings of .45. In FY07 the stock had a P/E ratio of 22.2, a P/Book ratio of 1.04, and a P/Sales ratio of 1.24. So it would seem that if the EPS returned to FY07 levels or higher, each of these ratios would follow suit.

As previously stated, the stock is dirt cheap and more than qualifies as a net/net stock. Net/net stocks with little debt have proven to be some of the most profitable stocks.

Is now the time to buy? Who knows. What I do know is that insiders are behind the stock at these levels and many successful institutional holders such as Third Avenue have been backing it at much higher prices than you would pay today.

The stock has plummeted over 75% in the past 6 months alone, so the risk/reward has now shifted heavily into the investor's favor. If you are willing to ride out the rest of 2008 and wait for year end 2009 earnings, it would seem that this would be a worthy investment. I would not jump into it with both feet, however. Averaging down every 10% it falls in 20% increments should serve you well in these market conditions.

Disclosure: Author holds a long position in GSIG

Comments

[seekingvalue:]

As far as I can see, this would be a net/net stock except that they purchased Excel Technologies for $350 million. That was payed for with cash and 'external financing', so it's probably not net/net any more. But please let me know if I'm mistaken.

2008 Oct 26 01:53 PM

[Corban Bates:]

Good point, I should have mentioned something about this in my article.... They report earnings on Thursday, October 30, 2008, and it will be interesting to see how their balance sheet shakes out. However, they did have 183 Million in cash, which grew 12 Million in Q2, and they recently sold their General Optics business for 21 Million; so that would bring their cash total to 204 Million (assuming they did not lose or gain any cash this past quarter). 348 Million for the acquisition minus 204 Million in cash means they had to come up with another 144 million somehow. Assuming all 144 million goes to their long term debt, it brings their total liabilities to 213.9. Also assuming their current assets and their shares outstanding stay about the same as they were last quarter, you have a NCAV of 2.9. This is definitely lower than before but it would still qualify as a net/net as it would be 65.53% of its NCAV. There's a lot of assumptions in there so I will definitely be interested in seeing how it all actually played out. Thanks for reading!

2008 Oct 26 03:52 PM

[bow_tie_chris:]

I in read in a recent report that Third Avenue Management has liquidated their position in GSIG as a result of the terms of the Excel acquisition. They found the financing for it "appalling". I hope the insiders are right.

2008 Oct 27 11:33 AM

[Corban Bates:]

You are absolutely right. I checked out Third Avenue's latest shareholder letter and they closed out their position, apparently MSN Money's info is outdated. Well these guys are obviously much smarter than I am, however they got in at much higher prices and have probably taken significant losses. I can imagine they are pretty frustrated with its performance and the acquisition may have been the last straw. I'm eager to see their latest quarter to see how all of this Excel acquisition stuff played out. However, as long as things haven't significantly changed I still view GSIG as a very cheap stock. I'll take an industry leader that sells for 25% of its tangible book value and is profitable any day. Anyone interested in this stock would be well served to wait until they release earnings to see some updated numbers however. I'm with you though in hoping that the insiders, along with the company upping its buyback plan, are right. I appreciate your comments.

2008 Oct 28 12:17 AM

[Elliot Eise...:]

It's not cash rich. You are correct


On Oct 26 01:53 PM seekingvalue wrote:

> As far as I can see, this would be a net/net stock except that they
> purchased Excel Technologies for $350 million. That was payed for
> with cash and 'external financing', so it's probably not net/net
> any more. But please let me know if I'm mistaken.

2008 Nov 01 04:33 PM

[jjabodee:]

I see a 10/9 press release stating that the company (after excluding $25M of ARS) equals only $70M.

2008 Nov 03 04:53 PM

[jjabodee:]

Sorry that wasn't clear. The cash position, totals $70M. They must be burning cash at a pretty fast clip. I think the company is set to report on 11/6 (thurs).

2008 Nov 03 04:54 PM

[Rockwell:]

This thing is trading like it's going to zero. Anyone heard anything recently?

2008 Nov 13 12:35 PM

[stevieaustin:]

Geez Corban, no offence but you might have put a bit more weight on that Excel purchase they transacted. It was abysmal. I have been looking for that Oct 30th earnings report you mentioned but can't see it wither on GSIG's webpage, Reuters, or the Sec filings.

What is visible is the resignation of Robert Bowen as CFO, such a shocking decision that you have to fall on your sword for that one. And to think that GSIG are being sued more mis-reporting $10m of earnings. They should be sued for incompetence in the financing of the Excel deal.

I

2008 Dec 21 04:31 PM

[Corban Bates:]

Yes I completely agree. This one turned out to be too good to be true. All the numbers said it was cheap but the numbers turned out to be inaccurate. There is a lawsuit against them and I am a part of it. I encourage anyone involved in this stock to contact one of the many firms involved to get your money back. The Third Avenue guys were dead on with this stock. This is why they are professionals and believe me I will not be betting against them in the future. I'll definitely take the hit for this one. However, I still believe net/nets are great investments (as long as the numbers are actually real) as a few others I own have more than doubled in a short period of time (i.e. the other article I wrote on Horsehead Holdings.)


On Dec 21 04:31 PM stevieaustin wrote:

> Geez Corban, no offence but you might have put a bit more weight
> on that Excel purchase they transacted. It was abysmal. I have been
> looking for that Oct 30th earnings report you mentioned but can't
> see it wither on GSIG's webpage, Reuters, or the Sec filings. <br/>
>
> What is visible is the resignation of Robert Bowen as CFO, such a
> shocking decision that you have to fall on your sword for that one.
> And to think that GSIG are being sued more mis-reporting $10m of
> earnings. They should be sued for incompetence in the financing of
> the Excel deal.
>
> I

Jan 06 12:20 PM