Here's Part 1.
In this article, I'll be analyzing T.A.T. Technologies Ltd.'s (TATT) balance sheet, highlighting an aspect that particularly stands out to me and explaining any adjustments I've made.
Before taking a look at the adjustments, I want to highlight how cash-rich TATT is. Without dipping into any other asset, they can easily pay off all of their liabilities (with cash to spare!). I really like this, especially when it combines with the fact that Current Assets minus Total Liabilities equals 86.5% of TATT's Market Cap. This helps provide a comfortable margin of safety, as it's not including long-term assets or the value of the business itself!
Now moving on to the adjustments. The goal here was to determine what it would cost to reproduce TATT as a business and reflect that in the balance sheet.
Again, I've used the approach demonstrated in Greenwald's Value Investing.
The first adjustment was the inclusion of TATT's shares in its subsidiaries. As can be seen, I applied a 2x multiple to Bental's & Limco-Piedmont's 2008 revenues and a 2x multiple to First Aviation's 2009 revenues to determine the worth of these companies.
In my opinion, this is a conservative estimate. It's likely that the stock market would be willing to pay up to 10x earnings, the multiple suggested in Value Investing. I was uncomfortable using that multiple as it raised the book value of TATT so significantly, it seemed unbelievable. I think a 2x multiple is more reasonable and if it ends up being too conservative, there is plenty of upside. I'm very interested in hearing people's thoughts on this, so comment below!
The second adjustment was the reduction of Intangible Assets & Goodwill to zero. As I mentioned above, these are assets I find difficult to quantify. While any attempt at reproducing TATT's business would inevitably include these costs, I feel that they should be excluded because if TATT closed tomorrow, we can't intelligently estimate the value these assets would return to shareholders.
Comparing the Net Worth and Adjusted Net Worth, we can see a major difference between the two (over $250m!). This suggests that TATT has a significant amount of unlocked value on its balance sheet.
Additionally, because of the massive discrepancy between TATT's current market value (~$87m) and the cost of reproducing its assets ($355m), TATT is a great acquisition target.
In closing, my analysis in Part 1 and in this article have led me to the conclusion that TATT has a significant amount of upside yet to be seen and would make an excellent investment at current prices.
Disclosure: Author holds a long position in TATT
Hidden Value in T.A.T. Technologies (Part 2)
Here's Part 1.