Digirad Still Showing Strong Potential

Digirad Corporation (NASDAQ:DRAD) has filed its 10Q for the quarter ended June 30, 2009.

We started following DRAD (see our post archive here) because it was an undervalued asset play with a plan to sell assets and buy back its stock. The stock is up more than 118% since we started following it to close yesterday at $1.92, giving the company a market capitalization of $36.1M. We last estimated the liquidation value to be around $29.5M or $1.56 per share. We’ve now increased our valuation to $32.5M or $1.73 per share following a very good quarter for DRAD, in which it generated over $2.2M in cash. DRAD has also now started to buy back stock under its previously announced $2M stock repurchase plan.

The value proposition updated

DRAD had a very good second quarter, generating $3M in operating cash flow and ending the quarter up more than $2.2M in cash. Our updated 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):

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 at December 31 were around $3.0M, around $1.4M of which falls due in the next 12 months to December 31, 2009.

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.”

According to the most recent 10Q, the company has now started to buy its own stock, albeit a relatively small amount:

On February 4, 2009, our board of directors authorized a stock buyback program to repurchase up to an aggregate of $2.0 million of our issued and outstanding common shares. The timing of stock repurchases and the number of shares of common stock to be repurchased are in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The timing and extent of the repurchase depends upon market conditions, applicable legal requirements, and other factors. During the three and six months ended June 30, 2009, we repurchased 198,000 and 209,000 shares, respectively, of our common stock at a cost totaling $0.3 million at a weighted average price of $1.28 per share.

Conclusion

At its $1.92 close yesterday, DRAD is trading at a small premium to its $32.5M or $1.73 per share in liquidation value. We’re generally sellers of secondary securities trading at a premium to liquidation value, but DRAD seems to have the potential to transition to a cash generator. We’d like to see where it can go. We can see no other reason to cease holding DRAD in the Greenbackd Portfolio and so we’re going to maintain the position for now.

Full Disclosure:

We do not have a holding in DRAD

Comments

[osotoro]

this is a poor and amateur analysis. I run 2 investment funds, own a nice chunk of this, DRAD has $1.66 in net cash, no debt, excess working capital plus excess eqpt of (easily) another $0.70/share, and a medical eqpt business doing $70mm in revenues and which just did $2mm ebitda in the past quarter alone (on minimal capex) and which is spitting out free cash flow, which is being bought today for FREE. This business is worth $2/share, thus the company is worth $5/share. NOLs make it worth more. For background, what your cursory analysis omits is that the balance sheet isnt accurate because DRAD's young/hungry CFO replaced the inept CEO who spent large monies on growing the services business. This inflated working capital and added to purchased equipment but yielded poor results. DRAD has no sold off pieces of this business and is in cash generation mode - thus the capex is down, w/c is dropping, excess equipment is held on books under accelerated amortized values (thus under market price), etc. Your analysis shows none of this. Good luck with that - services like yours are why, for 14 years, I have consistently been able to generate strong returns and alpha in this space. Keep up the good work.

2009 Aug 11 04:30 PM