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Global Tech Advanced Innovations (NASDAQ:GAI) announced results for its second quarter of fiscal 2014 (ended September 30, 2013) on December 30, 2013. Despite reporting a large loss, we believe the stock remains a compelling investment opportunity due to its low valuation, low investor expectation and favorable fundamental changes… three factors we look for in buying a stock. (For a more complete discussion of the company, please see our prior Seeking Alpha article.)

Fiscal Q2:14 Results Were Poor; EMS Business Is Closed.

GAI announced poor fiscal Q2:14 results with revenue down over 50% and experienced a large EPS loss, as shown below.

($MM)

Q2:14

Q2:13
Revenues$12.6$26.0
Net Income($5.2)$0.2
E.P.S.($1.70)$0.07

Included in Q2:14 results were $2.0 MM in one-time charges, $0.9 MM in a non-cash impairment charge, $0.2 MM in a provision for doubtful debts and $0.9 MM of severance expenses. Excluding these one-time charges the net EPS would have been a loss of $1.04. The Electronic Manufacturing Services (EMS) business continued to be hurt by the slow Chinese economy and high labor costs. The Electronic Components (EC) business was hurt by inventory rebalancing by their cell phone customers and delayed shipments.

The EMS business has generated large operating losses over the past 1-2 years and, in our opinion had a poor outlook. One of our original assumptions was that the company would exit this business. This has now happened. The company announced in the quarterly earnings release that it has closed the EMS business.

Stock remains A Compelling Buy

Low Valuation: At its current price of $7.20, the stock sells well below its $10.75 net cash per share (cash minus a small amount of debt and income tax payables) and well below its $23.12 book value. As discussed in our previous article, as of the end of FY2013 about half of the cash was held in U.S. dollars.

Low expectations: The company continues to be totally ignored by Wall Street analysts.

Favorable Fundamental Change: The EMS closure will eliminate the operating loss from this business. The company is considering leasing the equipment and facilities which, if done, would add income. The company is also considering leasing out the facilities idled by the prior closing of the consumer appliance business; doing so would add $1.5MM to earnings or $0.50 to EPS. Further, the largest remaining business, Electronic Components, should show improving results as delayed shipments are delivered and customer orders for higher pixel camera modules improve. In the recent press release, the CEO stated that "we expect improvement in the operating results of our electronic components business in the upcoming quarter."

Valuation

We think a conservative price target for the stock over the next year is around $12 per share, derived as follows:

80% of $10.75 net cash per share$8.60
7 times FY 2015 E.P.S. estimate of $0.50$3.50
Total value per share$12.10

If the stock price reaches $12 per share, it would provide a 67% investment return from current prices.

Potential developments that could increase that investment return include: further strengthening of the camera module business, growth of the nascent medical instrument business, stock repurchase or a going-private transaction.

Source: Global Tech Advanced Innovations: Still A Compelling Buy

Additional disclosure: I own GAI stock for my investment advisory clients. I also own GAI stock in the family and personal accounts.