Trident Microsystems: Net-Cash with a Catalyst

Trident Microsystems (TRID) is a company whose stock is trading substantially below its net-cash value. According to its latest SEC filing the company held nearly $212M in cash with $56M in total liabilities, for a net-cash value of $156M as of December 31, 2008. However, TRID’s market price is only $95M, nearly a 60% discount to its net cash.

TRID is a leader in integrated circuits for Digital Television. While its products are used in all kinds of displays, LCD television is its most important growth market as LCD televisions take share from plasma in the market for larger screens as well as traditional CRT television sets of all sizes. Additionally, TRID designs, develops, and markets integrated circuits (ICs) and associated software for digital media applications, such as digital television (digital TV) and digital set-top boxes (STB). The company also designs cross-platform software that allows multimedia applications to run on devices in the digital living room, including digital STBs and digital TV sets.

Looking at the company’s historical prices, we can see that Trident always traded above its net asset value up until this year. The company follows the typical case in Wall Street where analysts tend to emphasize earnings prospects and neglect the underlying value of assets. Once Wall Street realizes that positive earning prospects are no longer sustainable, the stock is sold off on the basis of poor earnings alone. This would never happen in the private market, where businesses tend to sale at a value equal to at least their net assets, plus a premium for earnings prospects for those which are profitable.

On its last earnings call, TRID reported net revenues of $19.2 million for the second quarter fiscal year 2009 representing a quarterly sequential decline of 45% compared with $34.8 million reported in the September 2008 quarter and a year-over-year decrease of 74% from the $75 million recorded in the same quarter of the prior year. Revenues from their top three customers represented 67% of total revenues in the second quarter. Revenues from the largest customer, headquartered in Japan, decreased by 63% from the prior quarter and represented 34% of total revenues. Amazingly, not a single analyst asked management about the company’s cash position and what their intentions are with this cash.

For the sake of conservatism, we value TRID based its cash at hand alone, assuming all other assets such as PPE and intangibles are worthless. Our analysis indicates TRID is currently trading at 60% below its net cash value, even all long-term assets are assumed to hold no value.

The Catalyst

Spencer Capital Management LLC, a New York-based investment partnership, announced on March 2, 2009 its intention to put forth a slate of candidates for election to the company’s board. We believe Spencer Capital will be able to realize some shareholder value in the near future. Spencer Capital is a New York-based fund advisor that specializes in deep value investing and is headed by Kenneth H. Shubin Stein, whose ascent to value investing has been nothing but ordinary.

In 2000 he founded Kenshu, LLC, the predecessor to the Spencer Capital Opportunity Fund, LP, which was formed in 2003. From 2001 to 2003 Dr. Shubin Stein managed Kenshu, LLC while also working as a portfolio manager for Promethean Investment Group, LLC. He joined Promethean after completing his internship in orthopedic medicine at Mount Sinai Medical Center in New York. Before his internship, he cofounded and managed Compo Asset Management, LLC, a U.S. based value investment partnership which was merged into Promethean. Prior to founding Compo, Dr. Shubin Stein was a medical technology analyst for The Abernathy Group in New York, an investment management firm specializing in the medical and technology sectors. Dr. Shubin Stein is a graduate of the Albert Einstein College of Medicine where he completed a 5-year medical and research program with a focus on molecular genetics. He graduated with a B.A. degree from Columbia College in 1991 with dual concentrations in Premedical Studies and Political Science. Dr. Shubin Stein holds the CFA designation and teaches an advanced investment research course to second year students at Columbia Business School.

In connection with their intended proxy solicitation, Spencer Capital Management, LLC and certain of its affiliates intend to file a proxy statement with the SEC to solicit TRID’s stockholders.

We believe TRID is a great investment at the moment because it is trading significantly below its net-cash value, and we believe Spencer Capital, a fund that focuses on deep value investing, will be a catalyst to close this gap and thus increase shareholder value. With an estimated cash burn of $6-7 million per quarter, TRID’s net cash would stand at nearly $2.1/share at the end of 2009. We estimate the company is worth at least $2.54/share based on its cash alone compared to a current market price of $1.53/share.

Disclosure: We do not have an actual holding in TRID.

Comments

[flashguy99999:]

Obviously this was written by Stein himself to self-promote his idea under the disguise of third-party support.

Stein: Lying like this isn't going to get you support for the campaign, is it? Credibility is gone before the solicitation even began.

First error you made was to pre-announce your solicitation. The company was able to amend their bylaws to make it harder for everyone to nominate.

Second error you made is to try to run an activist campaign without owning stock. You won't get sympathy when you haven't endured pain in your portfolio.

Third error is that you have no plan at all. Why the hell would I give you control of a company you own no stock without a premium when you have no plan at all?

Apr 01 08:51 AM