Rackable Systems Radical Buy-Back Should Increase Company's Liquidation Value

Mar.11.09 | About: Rackable Systems (RACK)

Rackable Systems Inc (RACK) is a new undervalued asset play with a plan to repurchase almost 40% of its stock at current prices. At RACK’s $3.56 closing price yesterday, the company has a market capitalization of $106.4M. We estimate the company’s liquidation value to be 60% higher at $170.3M or $5.74 per share. If the buy back is completed at the current stock price, the company’s per share liquidation value will increase by almost 25% to $7.00. We’re adding RACK to the Greenbackd Portfolio.

About RACK

RACK is a provider of servers and storage products for data centers. The company was founded in 1999 and is based in Fremont, California. The company’s investor relations website is here.

The value proposition

RACK, as its CEO points out in its earnings release, has had a tough year, burning through $15.7M in the 12 months to January 3, 2009. The company does still have a huge amount of cash and equivalents on its balance sheet (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 the company’s liquidation value to be around $171.6M or $5.74 per share, which is predominantly cash and equivalents in the amount of $172M or $5.75 per share. RACK’s net cash value is around $118M or $3.95 per share.

Off balance sheet arrangements and contractual obligations

The company hasn’t disclosed any off-balance sheet arrangements in its most recent 10Q. The contractual obligations as of September 27, 2008 were around $10.2M, around $2.1M of which falls due in the next 12 months. Those committments are minimum lease payments under the company’s operating leases. The company also had purchase commitments in the amount of $30.9M to the end of 2008. We’re not sure what these commitments are for the next 12 months.

The catalyst

RACK has announced a radical buy back plan to repurchase $40M of its stock. From the press release:

"2008 was a tough year for our industry and for Rackable. Given our strong financial flexibility with $181 million in cash and investments, we plan on making key investments for 2009,” said Mark J. Barrenechea, president and CEO of Rackable Systems. “First, we plan to invest up to 10% of our cash to expand our product offerings and our sales and service capabilities. Second, the company announced a $40 million share repurchase program today. We believe this is an ideal time to invest in Rackable and that these investments will place the company in a stronger competitive position to gain market share as the economy recovers.”

We estimate that that such a buy back at the present prices will increase the company’s per share liquidation value by almost 25% to $7.00. This is a substantial upside to the current stock price.


It’s great to see company recognizing that its stock is deeply undervalued and taking radical action to capitalize on it. If the market is pricing your stock below its liquidation value, there are bargains to be had by investing in that stock, and we believe it should be your priority. With its stock at $3.56, RACK has a market capitalization of $106.4M, which means it’s trading at a discount to both its net cash value of $118M or $3.95 per share and its liquidation value of $171.6M or $5.74 per share. The cash burn is a risk, but we think RACK is a good bet at this level.

RACK closed yesterday at $3.56.

The S&P500 Index closed yesterday at 719.60 (!).

Hat tip to manny.

Full Disclosure: We do not have a holding in RACK. 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.