We started following FORD (see the post archive here) because it was trading at a discount to its net cash and liquidation values, although there was no obvious catalyst. Management appeared to be considering a “strategic transaction” of some kind, which might have included an “acquisition or some other combination.” I think a better use of the cash on the balance sheet is a share buy-back or a dividend.
Trinad Management had an activist position in the stock, but had been selling at the time I opened the position and only one stockholder owned more than 5% of the stock. The stock is up 40.3% since I opened the position to close yesterday at $2.00, giving the company a market capitalization of $15.9M. Following my review of the most recent 10K, I’ve increased my estimate of FORD’s liquidation value to around $20.3M or $2.56 per share.
The value proposition updated
FORD continues to face difficult trading conditions, writing in the most recent 10K:
Trends and Economic Environment
We believe that the poor economy, high unemployment, tight credit markets, and heightened uncertainty in financial markets during the past two years have adversely impacted discretionary consumer spending, including spending on the types of electronic devices that are accessorized by our products. In response to the economic recession certain of our major diabetic case customers have significantly reduced their sales forecasts to us for blood glucose diagnostic kits, with which our products are packaged in box, therefore implying reduced sales revenues from these customers in future periods. We expect this challenging business environment to continue in the near term.
Our response to current conditions has been to cut operating expenses and reduce headcount; and we have attempted to limit increases in operating expenses except where we think increases are critical to potential future growth.
In response to increasing customer and sales concentration, we have focused marketing efforts on expanding our customer base. These efforts are meeting with some preliminary success, although the degree of success will not become apparent until we are deeper into Fiscal 2010. We have received small, initial orders from first time customers. The key question in Fiscal 2010 will be whether our overall net sales and net profit will primarily reflect revenue contribution from new customers or the decline in revenues from existing customers that have indicated reduced order flow in Fiscal 2010. See Part I, Item IA. of this Annual Report, “Risk Factors”, including “We have announced our intention to diversify our business by means of acquisition or other business combination.”
The company had another quarter that was better than the preceding one, generating positive cash from operating activities of around $0.35M (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): (Click to enlarge)
Summary balance sheet adjustments
I’ve made the following adjustments to the balance sheet estimates (included in the valuation above):
- Cash burn: I’ve got no real idea about FORD’s prospects. It seems to have stopped burning cash over the last quarter and actually generated $0.35M. If we assume, as management has, that the company will face a tough operating environment over the next 12 months, I estimate that the company will generate no cash over that period.
- Off-balance sheet arrangements: According to FORD’s most recent 10Q, it has no off-balance sheet arrangements.
- Contractual obligations: FORD’s contractual obligations are minimal, totalling $0.8M.
FORD’s President and Acting Chairman, Mr. Doug Sabra, said in the letter to FORD shareholders accompanying the notice of annual shareholders’ meeting, that in 2008
management began to implement operational and strategic initiatives in order to put [FORD]’s business on a stronger, more sustainable footing. … This past August we retained an outside consultant to assist us in vetting possible partners for a strategic transaction.
It seems that the “strategic transaction” might include a
possible acquisition or other combination that makes sense in the context of [FORD's] existing business, without jeopardizing the strong financial position that we have worked so hard to build.
My vast preference is for a sale of the company, buyback, special dividend or return of capital over an acquisition. Rather than spend the cash on its balance sheet, the company should focus on the work on its desk and pay a big dividend.
Any sale transaction will require the consent of FORD’s board. While it has a free float of around 92%, the company’s so-called “Anti-takeover Provisions” authorizes the board to issue up to 4M shares of “blank check” preferred stock. From the 10K:
Our Board of Directors is authorized to issue up to 4,000,000 shares of “blank check” preferred stock. Our Board of Directors has the authority, without shareholder approval, to issue such preferred stock in one or more series and to fix the relative rights and preferences thereof including their redemption, dividend and conversion rights. Our ability to issue the authorized but unissued shares of preferred stock could be used to impede takeovers of our company. Under certain circumstance, the issuance of the preferred stock could make it more difficult for a third party to gain control of Forward, discourage bids for the common stock at a premium, or otherwise adversely affect the market price of our common stock. In addition, our certificate of incorporation requires the affirmative vote of two-thirds of the shares outstanding to approve a business combination such as a merger or sale of all or substantially all assets. Such provision and blank check preferred stock may discourage attempts to acquire Forward. Applicable laws that impose restrictions on, or regulate the manner of, a takeover attempt may also have the effect of deterring any such transaction. We are not aware of any attempt to acquire Forward.
FORD is still trading at a substantial discount to its liquidation and net cash values. The risk to this position is management spraying the cash away on an acquisition. A far better use of the company’s cash is a buyback, special dividend or return of capital. Another concern is Trinad Management exiting its activist position in the stock. Those concerns aside, I’m going to maintain the position because it still looks cheap at a discount to net cash.
[Full Disclosure: We have a holding in FORD. 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.]