Creating Shareholder Value

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 |  Includes: FEIM, NOOF, PLXT, PTG, WDGJF
by: John DiStanislao

I was interested in searching for companies that could be exploiting this bear market in the hopes that they will increase future shareholder value. A potential overlooked financial measure not immediately obvious is actual large share buybacks at depressed prices over the past 6 months. For some companies these purchases could turn out to be the most prudent allocation of shareholder capital. Many companies will issue press about share buybacks and never buy those shares. Other companies will never make a public announcement and actually buy large amounts of shares. I began the search using the cash flow statement to get a tangible measure of how much money was expended on share repurchases by quarter.

Using the “Financing Activities” section of the cash flow statement I reviewed the line item “sale or purchase of stock”. A negative indicates the expenditure of cash on share buybacks and positives would be the receipt of cash from the exercise price of options or the issuance of new shares. This may be obvious, but I believe it’s an area that can provide new ideas as part of a more complete analysis.

My initial thought was to examine the past 4 reported quarters emphasizing the most recent quarterly activity. I took the amount expended on share buybacks as a percentage of the current market capitalization, enterprise value and the float value to gauge the relative magnitude. The first stock that appeared at the top of the list was Hampshire Group (OTCPK:HAMP). It looked interesting given the stock purchases for the 3 month period ending 09/27/08 was 11,952,000. This amount was material considering the market cap of ~ 12 million on Monday, February 23. They reduced the shares outstanding from 7,860,000 on 02/07 to 6,441,000 on 2/08. I was interested and wanted to take a closer look. Unfortunately, I quickly discovered that on Tuesday (02/24/09) they received an all cash offer for $5.50 or a 190% premium from Monday’s (02/23/09) close at $1.85.

Lucky find, yes, but I wanted to continue with the approach to see what else I would uncover. So I applied this method to over 4,000 companies. The financial sector was excluded and added the additional criteria below along with other decision making data.

  1. Year over year share count reduction
  2. Enterprise value less than 140% of market cap (a margin of safety measure)
  3. Positive CFFO for current reported 12 month period
  4. Share price > $1.00
  5. Positive insider activity
  6. Shares short as a percentage of float < 5%
  7. Recent one year of reported net purchases of stock / current total float value, market cap or enterprise value greater than 15% of total

Some of the ideas were as follows:

  • New Frontier Media Inc (NASDAQ:NOOF) $1.43
  • Paragon Technologies (PTG) $2.54
  • PLX Technology (NASDAQ:PLXT) $2.14
  • Frequency Electronics (NASDAQ:FEIM) $2.58

Additional financial data for the above ideas:

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Click to enlarge Disclosure: I have a long position in NOOF