Digirad Planning to Sell Assests and Buy Back Stock

Digirad Corporation (DRAD) is a tiny undervalued asset play with a plan to sell assets and buy back its stock. At its $0.88 close on Friday, the company has a market capitlization of $16.7M. We estimate the liquidation value to be around 76% higher at $29.3M or $1.55 per share. The company’s net cash value is around $16M or $0.85 per share, which means the company is trading at a small premium to its net cash. DRAD plans to put the cash to good use, announcing a share buyback to repurchase $2M of its stock.

About DRAD

DRAD is a provider of cardiovascular imaging services and solid-state nuclear medicine imaging products to physician offices, hospitals and other medical services. The company operates through its wholly owned subsidiaries, Digirad Imaging Solutions, Inc. and Digirad Ultrascan Solutions, Inc. The company’s investor relations website is here.

The value proposition

DRAD’s earnings and cash flow are nothing to write home about. The company generated positive cash from operating activities for the last two years of $4.72M in 2007 and $2.37M in 2008, but capital expenditures have made the company a net consumer of cash. The summary of our estimate for the company’s liquidation value is set out below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

We estimate DRAD’s liquidation value at around $29.3M or $1.55 per share.

Off balance sheet arrangements and contractual obligations:

The company hasn’t disclosed any off-balance sheet arrangements in its most recent 10K. The contractual obligations as at December 31 were around $3.0M, around $1.4M of which falls due in the next 12 months.

The catalyst

DRAD’s board has announced a stock buyback program:

The Company also announced that its board of directors has authorized a stock buyback program to repurchase up to an aggregate of $2 million of its issued and outstanding common shares. Digirad had approximately 19 million shares outstanding as of December 31, 2008. At current valuations, this repurchase plan would authorize the buyback of approximately 2.1 million shares, or approximately 11 percent of the company’s outstanding shares.

Chairman of the Digirad Board of Directors R. King Nelson said, “The board believes the Company’s direction and goals towards generating positive cash flow and earnings coupled with an undervalued stock price present a unique investment opportunity. We are confident this will provide a solid return to our shareholders.”

The impact of a $2M stock buyback at Friday’s closing price is to increase per share liquidation value by around 6% to $1.64 and leaves the company with $26.3M in cash and short term investments. We’d like to see a larger buyback (for example, $5M increases the per share value by around 20% and leaves $23.3M in cash), but this is a good start.

Conclusion

At its $0.88 close on Friday, DRAD is trading at around 76% higher at $29.3M or $1.55 per share. The company is trading at around 57% of its $29.3M or $1.55 per share in liquidation value and at a small premium to its $16M or $0.85 per share in net cash. The share buyback to repurchase $2M of its stock will increase the per share liquidation value by around 6% to $1.64. We’re adding DRAD to the Greenbackd Portfolio.

DRAD closed Friday at $0.88.

The S&P500 Index closed Friday at 683.38.

Hat tip to JM.

Full Disclosure: We do not have a holding in DRAD. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.

Comments

[chaeflin:]

Actually they should be able to sell the entire company for 1/2 to 1 times revenue depending on cash flow following the sale of unprofitable centers. Company would be worth $2 to $4 a share under that scenario.

Mar 09 10:57 AM