LGL: Trades At Less Than 50% Of Liquidation Value And Should Return To Profitability In 2013

| About: The LGL (LGL)

The LGL Group (NYSEMKT:LGL) "engages in the design, manufacture, and sale of custom-designed engineered electronic components that are primarily used to control the frequency or timing of signals in electronic circuits."

The company's business has high fixed costs and is generally only profitable when revenues exceed ~$9 million. The last time they have been that high was Q3 2011. (For a good historical trend analysis of the company's financials please see the company's latest investor presentation. Page 7.)

Several bloggers have also done an excellent job outlining the overall investment thesis (including the risks involved) such as: Petty Cash, Whopper Investments, and Barel Karsan.

The investment thesis for LGL is simple. The company's market cap is currently ~$13.25 million and is currently trading at an enterprise value of only ~$5.25 million. Book value of equity is $25 million (~$10 a share) of which $11 million is cash. Liquidation value is likely even higher than the book value of equity as the company owns "11 acres (including a 28,000 sqft building) in South Dakota and 7 acres (including a 71,000 sqft building) in Orlando, Florida" and specialized manufacturing equipment which has already been significantly depreciated.

The company has currently been losing about $200-$300k per quarter as revenues are below the $9 million breakeven point. Revenues have been sluggish due to the uncertain macroeconomic environment and cut in military spending. I believe the company should get back above break-even revenue levels in the near term due to the upcoming major worldwide 4G/LTE rollouts which require the technology that LGL manufactures. In addition to the major 4G rollout being initiated in the US, major demand for telecom should revive in India due to the conclusion of the 2G spectrum scam which suspended most operator rollout.

In the near term, LGL's stock price should recover along with the telecom rollout over the next 2-3 years. The major catalyst I would like to see would be for LGL to either merge or be acquired. Hopefully Marc Gabelli, the chairman of the board, who also owns a significant percentage of the company, will initiate a strategic process soon.

(Disclaimer: As with all investing, especially low liquidity stocks, you should do your own research and make your own judgment. Don't simply rely on articles like this one. I make errors frequently so double check everything I write.)

Disclosure: I am long LGL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.