Truly rational capital management too rarely resides in the executive suites of publically traded businesses. More often, a myopic focus fixes on growing the empire by acquiring more assets, all while ignoring the owners’ interests—the productive use of retained earnings. Or, perhaps worse, abdicated vision instills an aura of lethargy.
Of course I say as much knowing that I risk branding myself a crank. However, anomalies occasionally surface; when one catches glimpses of such glory, praise should abound. And today, the laurels should go to the Board and managers of FortuNet, Inc. (FNET)
FortuNet, Inc. is a small, established manufacturer of multi-game and multi-player server-based gaming platforms, based out of Las Vegas, NV. With 50 employees, a market cap of $32.24 million, 11.04 million shares outstanding, and a price of $2.92, FortuNet is not going to turn many heads on the NASDAQ Global Market. Investors though would do well to take a look, since the company recently announced (and shareholders recently approved) that it will be paying a special cash dividend of $2.50 per share on May 4th, to shareholders of record on April 24th.
FortuNet had its IPO in January 2006, which brought net proceeds of $23.7 million. And since that offering, the company has struggled to find ways to put that capital to productive use. Some went to dividends, some to buybacks, but the end of fiscal year 2008 saw FortuNet’s bank accounts swollen with nearly $26.5 million in cash and short-term investments. This at a time when the market valued the entire company at less than $20 million. Of course, FortuNet is not the only microcap whose share price has been hammered in recent months; many—like KSW (NASDAQ:KSW)—have cash balances at their bank that exceed their market capitalization. However, unlike FortuNet, most of these companies are content to sit on their cash and count their pennies; or, even worse, dole it out on overpriced and impulsive acquisitions.
Since FortuNet’s announcement, its market price has soared from its lows. However, even at yesterday’s prices, the market effectively only values FortuNet’s business at about $4.64 million, or 42 cents per share ($2.92 less the upcoming dividend). And this for a business that earned 25 cents per share in 2008.
At these prices, I find FNET a compelling value, whose price and upcoming dividend offers a substantial margin of safety, particularly if the cash distribution is received in a tax-advantaged account (because the distribution may be taxed in a taxable account). After paying out the $27.6 million ($2.5 on 11.04 million shares) on May 4th, FNET will have a book value of about $16 million, or $1.45 per share. And it’s worth bearing in mind that FNET has shown positive FCF over each of the last six years (the only for which Morningstar data is available).
All told, I find FNET’s Board and management worthy of praise, for doing the right thing for its owners, even at the cost of reducing the amount of assets available for them to play with. It requires abundant honesty and candor to openly admit that productive uses for retained cash are too few and too risky. Human nature entices the powerful and capable to overestimate their abilities, and too often the result is irrational capital management. Kudos to FNET; may your fortune match your deeds.
Disclosure: I, or persons whose accounts I manage, own shares of FortuNet at the time of this writing.