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

| About: Novanta Inc. (NOVT)

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 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