Emerson Radio (MSN) is in the small appliance and electronic business. The company sources, designs, markets, and eventually sells these products to large retailers such as Target (TGT) and Wal-Mart (WMT), among others. The company's product lines include compact refrigerators, wine coolers, microwaves, clock radios and other electronics including but not limited to televisions. The company doesn't actually manufacture products, it contracts Chinese manufacturers to produce while the company just sells the completed products.
The company recently came to my attention while screening for profitable companies trading below book value. Emerson has a $47M market cap, yet it's sitting on $52M worth of cash. It's trading at a miniscule 0.62 price to book value. The company is also profitable, recording a profit of $10.6M during its 2012 fiscal year. Why exactly is Emerson so cheap?
Not all is well at Emerson. Wal-Mart (WMT) is its biggest customer, and it's not exactly treating Emerson very well. In 2011 it stopped carrying the company's compact refrigerators, and recently in October 2012 Wal-Mart announced it will stop carrying Emerson's microwaves in the spring of 2013. The company reported that this decision will decrease 2014 revenues by some $48M - or 31% of sales. Ouch.
Emerson has responded by:
intend[ing] to immediately commence a process to consider various strategic alternatives, including a complete analysis of its current and prospective product lines
Over 90% of the company's revenue came from two stores - Wal-Mart and Target. (TGT) The Wal-Mart business has basically gone away, while the company actually increased its sales to Target, albeit only slightly. The company's path at this point is simple, it needs to diversify its customer base. There are many large retailers - including Lowes (LOW), Home Depot (HD), Bed Bath and Beyond (BBBY) among others - that the company needs to penetrate if it's going to have any hope to grow.
There's another red flag, and that's the status of over 10% of the company's outstanding shares. In 2010, a company called S&T International Distribution pledged its 3.7M shares as collateral for a loan from Deutsche Bank. S&T later defaulted on that loan, so Deutsche Bank claimed control of the shares, which represent 12.5% of Emerson's share count. The case is still tied up in Hong Kong bankruptcy court. Deutsche Bank has filed with the SEC that it's are the owner of the disputed shares, but it's not certain until the case is settled in Hong Kong court. I'm confident the courts will rule in Deutsche Bank's favor, as it's already sold nearly 10% of its position.
The company is also battling the IRS. In 2010, the company issued a special dividend of $1.10 per share. The company didn't withhold the tax owed by S&T because it determined the foreign company wasn't subject to tax. The IRS disagrees, and there is potential for Emerson to owe the IRS some sort of penalty for its transgression. The company believes that the IRS will go after S&T for the owed tax, and I share its opinion that the company has little chance of suffering meaningfully from this.
After all that negative stuff, why exactly am I bullish on the company?
Emerson has a licensing business, which was up over 100% year over year compared to last year. It is a small portion of its business, but it's essentially all profit. This is an extremely lucrative business that the company can continue to grow.
The company has earned $0.21 per share over the first 6 months of its fiscal 2013, which began on April 1st, 2012. That's compared to $0.19 for the same period last year, and $0.39 for the entire year. Emerson's business is almost entirely variable costs, so it's not difficult to keep them in check. Since the company estimates the Wal-Mart loss to be 31% of next year's revenue, we can estimate earnings to decrease to $0.27. That's not bad for a stock that's only trading at $1.70.
There's also the matter of the giant pile of cash the company is sitting on. Once the IRS business gets taken care of, the company could potentially pay out another special dividend. A $1 per share special dividend would only deplete half its cash reserves, unlocking value for current shareholders.
Plus, shareholders have an activist hedge fund on their side. Raging Capital announced in January that it's increased its stake in the company to 6.3% of outstanding shares. The hedge fund thinks management is a little too closely tied to Grande, the company's largest shareholder. If Raging Capital can shake things up a little, this might be good for the share price.
If the company does some shareholder friendly moves, the stock could easily see major upside from these levels, especially if it declares another special dividend.